Q4 2023 Tyler Technologies Inc Earnings Call

Unknown Executive: Ladies and gentlemen, thank you for standing by. Hello, and welcome to today's Tyler Technologies fourth quarter 2023 conference call. Your host for today's call is Lynn Moore, President and CEO of Tyler Technologies. At this time, all participants are in a listen-only mode.

Ladies and gentlemen, thank you for standing by.

Welcome to today's condo technologies fourth quarter 2023 conference call you'll have for today's call is Lynn Moore, President and CEO of Kala technologies. At this time all participants are in a listen only mode. Later, we will conduct a question answer session and instructions will follow at that time.

Unknown Executive: Later, we will conduct a question and answer session, and instructions will follow at that time. In order to address your questions and stay within the allotted time, please limit your questions to one and one follow-up question per person. And as a reminder, this conference is being recorded today, February 15th, 2024. I would like to turn the call over to Hala Elsherbini, Pilot's Senior Director of Investor Relations. Please go ahead.

In order to address your questions and stay within the allotted time. Please limit your questions to one and one follow up question per person.

As a reminder, this conference is being recorded today that'd be 15th 2024.

I would like to turn the call either Johanna Ellis.

Johanna Ellis: Hello, Sabini Carlo Senior director of Investor Relations. Please go ahead.

Hala Elsherbini: Thank you, Babesh, and welcome to our call. With me today is Lynn Moore, our President and Chief Executive Officer, and Brian Miller, our Chief Financial Officer. After I give the Safe Harbor Statement, Lynn will have some initial comments on our quarter, and then Brian will review the details of our results and provide our annual guidance for 2024. Lynn, we'll end with some additional comments, and then we'll take your questions. During this 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 Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected.

Sabini Carlo: Thank you Bob fish and welcome to our call.

With me today as Lynn Moore, our President and Chief Executive Officer, and Brian Miller, Our Chief Financial Officer.

Lynn Moore: After I give the safe Harbor statement and Lynn will have some initial comments on our quarter and then Brian will review the details of our results and provide our annual guidance for 2024.

Lynn Moore: Glenn will end with some additional comments and then we'll take your questions.

Lynn Moore: During this call management may make statements that provide information other than historical information and may include projections concerning the companys future prospects revenues expenses and profits.

Speaker Change: Such statements are considered forward looking statements under the safe Harbor provision of the private private Securities Litigation Reform Act of 1995 and are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projections. We would defer we would refer you to our Form 10-K and other SEC.

Hala Elsherbini: We would refer you to our Form 10-K and other SEC filings for more information on those risks. Also, in our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry. A reconciliation of GAAP to non-GAAP measures is provided in our earnings release.

Speaker Change: Filings for more information on those risks.

Also in our earnings release, we have included non-GAAP measures that we believe facilitate understanding of our results and comparisons with peers in the software industry and reconciliation of GAAP to non-GAAP measures is provided in our earnings release. We've also posted on the Investor Relations section of our website under the financials tab schedules with supply.

Hala Elsherbini: We have also posted on the Investor Relations section of our website, under the Financials tab, schedules with supplemental information, including information about quarterly bookings, backlog, and recurring revenue. On the Events and Presentations tab, we posted an earnings summary slide deck to supplement our prepared remarks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify otherwise. Thanks, Hala.

Speaker Change: Rental information, including information about quarterly bookings backlog and recurring revenues on the events and presentations tab. We've posted an earnings summary, slide deck to supplement our prepared remarks. Please note that all growth comparisons we make on the call today will relate to the corresponding period of last year unless we specify.

Lynn Moore: Otherwise Lynn.

Lynn Moore: Thanks Ali.

Lynn Moore: The fourth quarter results reflected a strong finish to a pivotal year in our cloud transition and return to year-over-year operating margin expansion. We achieved our key objectives for the year, and earnings and cash flow surpassed our expectations, with free cash flow representing a new high for the fourth quarter. Recurring revenues grew 8% and comprised 84% of our total revenues.

Fourth quarter results reflected a strong finish to a pivotal year in our cloud transition and return to year over year operating margin expansion.

We achieved our key objectives for the year in earnings and cash flow surpassed our expectations with free cash flow, representing a new high for a fourth quarter.

Lynn Moore: Recurring revenues grew 8% and comprised 84% of our total revenues.

Lynn Moore: Our SAS mix continued to accelerate and comprised 89% of Q4 new software contract value. The quarter was also highlighted by SAS revenue growth of 21.7% and represented our 12th consecutive quarter of SAS revenue growth of 20% or more, exceeding our near-term growth expectations of a 20% CAGR in SAS revenues through 2025. Transaction-based revenues were impacted by seasonal trends and contractual changes in one of our state enterprise agreements that included a change from a gross to a net revenue model for payments. I want to remind you of the significance of pass-through merchant fees in our payments business and how they impact both revenue growth and margins. The majority of our payment processing arrangements are accounted for under a gross model, where we charge a fixed percentage of the transaction and are responsible for the merchant and interchange fees. Under this model, merchant fees are reflected in both revenues and expenses, with a resulting drag on margins.

Lynn Moore: Our SaaS mix continued to accelerate and comprised 89% of Q4, new software contract value.

Lynn Moore: The quarter was also highlighted by SaaS revenue growth of 21, 7% and represented our 12th consecutive quarter of SaaS revenue growth of 20% or more exceeding our near term growth expectations of a 20% CAGR in SaaS revenues through 2025.

Lynn Moore: Transaction based revenues were impacted by seasonal trends and contractual changes in one of our state enterprise agreements that included a change from a gross to a net revenue model for payments.

Lynn Moore: I want to remind you of the significance of pass through merchant fees in our payments business and how they impact both revenue growth and margins.

Lynn Moore: The majority of our payment processing arrangements are accounted for under a gross model, where we charge a fixed percentage of the transaction and are responsible for the merchant and interchange fees.

Lynn Moore: Under this model merchant fees are reflected in both revenues and expenses with a resulting drag on margins.

Lynn Moore: In a smaller number of arrangements, the client is responsible for paying merchant fees directly, and we record revenues on a net basis. We started to realize the benefits of our cloud optimization efforts as we released cloud-efficient versions of many of our products and began to experience hosting cost improvements as we scaled our deployments at AWS. These efficiencies related to our cloud operations contributed significantly to our year-over-year operating margin expansion in the fourth quarter. Cloud adoption with both new and existing on-premises clients continued at an accelerated pace across our product portfolio. In the fourth quarter, the number of on-premises migrations, or flips, signed was a new fourth-quarter high at 92.

Lynn Moore: And a smaller number of arrangements. The client is responsible for paying merchant fees directly and we record revenues on a net basis we.

Lynn Moore: We do not control, which model the client chooses although we expect that the majority of payment processing contracts will continue to be under the gross model.

Lynn Moore: Throughout the year and during the fourth quarter, we continued to make solid progress with key initiatives around our cloud transition.

We started to realize the benefits of our cloud optimization efforts as we released cloud efficient versions at many of our products and began to experience hosting cost improvements as we scaled our deployments at AWS.

Lynn Moore: These efficiencies related to our cloud operations.

Lynn Moore: <unk> contributed significantly to our year over year operating margin expansion in the fourth quarter.

Lynn Moore: Cloud adoption with both new and existing on premises clients continue to an accelerated pace across our product portfolio.

Lynn Moore: In the fourth quarter, the number of on premises migrations or flips signed was a new fourth quarter high at 92.

Lynn Moore: The increased SaaS adoption in 2023 was particularly notable in the public safety market, where we saw a significant increase in SaaS adoption with new clients, as well as signing our first flip. We also signed an expanded multi-year strategic collaboration agreement with Amazon Web Services to further enable the growing demand for our clients and public sector agencies to move to the cloud. Under the expanded agreement, we will jointly expand our framework and share programs to streamline migrations from on-premises solutions to our next-generation cloud applications. This is another major step forward in making the cloud accessible for our clients, further improving business continuity, continuous delivery, and enhanced security. It also supports our Tyler 2030 vision to complete our transition to the cloud. The public sector market remains very healthy, as evidenced by our elevated levels of RFPs and sales demo activity.

Lynn Moore: The increased SaaS adoption in 2023 was particularly notable in the public safety market, where we've seen a significant increase in SaaS adoption with new clients as well as signing our first flips.

Lynn Moore: We also signed an expanded multi year strategic collaboration agreement with Amazon Web services to further enable the growing demand for our clients and public sector agencies to move to the cloud.

Under the expanded agreement, we will jointly expand our framework and share programs to streamline migrations from on premises solutions to our next generation cloud applications.

Lynn Moore: This is another major step forward in making the cloud accessible for our clients further improving business continuity continuous delivery and enhanced security.

Lynn Moore: It also supports our Tyler 2030 vision to complete our transition to the cloud.

Lynn Moore: The public sector market remains very healthy as evidenced by our elevated levels of Rfps and sales demo activity.

Lynn Moore: Our pipeline reflects the benefits of a heightened level of sales collaboration across our division, driving strong upsell, cross-sell, and multi-suite deal momentum. Additionally, we continue to build sales synergies across Tyler with our integrated payments team as we execute our unified payment strategy. I'd like to highlight some of our significant fourth quarter wins.

Lynn Moore: Our pipeline reflects the benefits of a heightened level of sales collaboration across our divisions driving strong upsell cross sell and multi suite deal momentum.

Lynn Moore: Additionally, we continue to build scale to build sales synergies across Tyler with our integrated payments team as we execute our unified payment strategy.

Speaker Change: I'd like to highlight some of our significant fourth quarter wins.

Speaker Change: Our new transaction based contracts included a landmark win with the California Department of parks and recreation for integrated outdoor recreation platform.

Lynn Moore: Our new transaction-based contracts included a landmark win with the California Department of Parks and Recreation for our Integrated Outdoor Recreation Platform. This transaction-based, 8-year contract is the largest transaction-based arrangement in Tyler's history. This self-funded contract, which is provided at no cost to California taxpayers, is valued at an estimated $175 million and includes two one-year renewal options. It extends our existing relationship under our 2016 agreement, formerly known as U.S.C. Direct, with enhanced functionality to add Tyler's end-to-end payment solution, enabling everything from reservation booking to payment processing. We're honored to be chosen to have such a key role in managing the nation's largest state park system.

Speaker Change: This transaction based eight year contract is the largest transaction based arrangement in Tyler's history.

Speaker Change: This self funded contract, which is provided at no cost to California taxpayers is valued at an estimated $175 million and includes two one year renewal options.

Speaker Change: It extends our existing relationship under our 2016 agreement formally as USC direct with enhanced functionality to add Tyler's end to end payment solution, enabling everything from reservation booking to payment processing.

Speaker Change: We're honored to be chosen to have such a key role in managing the nation's largest state park system.

We also added to our growing footprint in outdoor recreation with a multiyear transaction based contract with the Wyoming State parks and a SaaS arrangement with the city of Miami, Florida.

Speaker Change: We continue to execute on cross sell opportunities through our digital solutions, formerly Nic's state enterprise agreements that enable enhanced resident engagement across multiple public sector services.

Lynn Moore: We also added to our growing footprint in outdoor recreation with a multi-year transaction-based contract with the Wyoming State Parks and a SAAS arrangement with the City of Miami, Florida. We continue to execute on cross-sell opportunities through our digital solutions, formerly NIC, state enterprise agreements, that enable enhanced resident engagement across multiple public sector services. We signed two contracts under our state enterprise agreement in Mississippi as part of our newly launched resident engagement platform using Tyler's MyCivic platform. Working with the Mississippi Attorney General, we launched the Mississippi Access to Maternal Assistance mobile app, which includes the program's website and MyCivic platform to bridge access to public and private services across the state.

Speaker Change: We signed two contracts under a state enterprise agreement in Mississippi as part of our newly launched resident engagement platform using Tyler's my civic platform.

Speaker Change: Working with the Mississippi, Mississippi Attorney General, we launched the Mississippi access to maternal assistance mobile App, which includes the program's website and <unk> platform to bridge access to public and private services across the state.

Speaker Change: We also signed an agreement with the Mississippi Department of mental health to develop a mobile application on our <unk> platform that will allow the agency to provide useful mental health information to mississippians affected by mental illness.

Speaker Change: We continued to build momentum in the public safety market with strong fourth quarter contract activity <unk>.

Speaker Change: Significant contracts included several competitive wins against key competitors, making 2023, our most successful new business year in public safety since we acquired new World systems in 2015.

Lynn Moore: We also signed an agreement with the Mississippi Department of Mental Health to develop a mobile application on our MyCivic platform that will allow the agency to provide useful mental health information to Mississippians affected by mental illness. We continue to build momentum in the public safety market with strong fourth-quarter contract activity. Significant contracts included several competitive wins against key competitors, making 2023 our most successful new business year in public safety since we acquired New World Systems in 2015. We also experienced a significant increase in SAS adoption of our public safety solutions, with SAS comprising 46% of our fourth quarter public safety deals. Existing on-premises public safety clients are also showing heightened interest in moving to the cloud, and three public safety clients signed contracts in the fourth quarter to flip to the cloud.

Speaker Change: We also experienced a significant increase in SaaS adoption of our public safety solutions with SaaS, comprising 46% of our fourth quarter public safety deals.

Speaker Change: Existing on premises public safety clients are also showing heightened interest in moving to the cloud and three public safety clients sign contracts in the fourth quarter to flip to the cloud.

Speaker Change: The city of Comat Falls, Oregon embraced the cloud first strategy signing a contract for SaaS deployment for integrated enterprise public safety suite, which includes the full suite of our public safety solutions, including Enterprise Records management Geo manager fire electronic patient care reporting <unk>.

Speaker Change: Civil process E citations and analytics.

Our recent contract signed in Q2 with the Oregon State patrol serve as a strong reference for this competitive win.

Speaker Change: Other notable public safety deals included SaaS contract with Santa Rosa County, Florida, and on premises concept contracts with Rensselaer County, and Wayne County, both in New York.

Lynn Moore: The City of Klamath Falls, Oregon, embraced a cloud-first strategy, signing a contract for a SAS deployment for our Integrated Enterprise Public Safety Suite, which includes the full suite of our public safety solutions, including Enterprise Records Management, Jail Manager, FHIR, Electronic Patient Care Reporting, Civil Process, eCitations, and Analytics. Our recent contract signed in Q2 with the Oregon State Patrol serves as a strong reference for this competitive Other notable public safety deals include a SAS contract with Santa Rosa County, Florida, and on-premises contracts with Rensselaer County and Wayne County, both in New York.

Speaker Change: We also had a significant cross sell win under our state Enterprise agreement in Arkansas for a public safety solution for Pulaski County, Arkansas.

Speaker Change: And the court space, we signed our first SaaS flip of a statewide court system with the Idaho Supreme Court.

Speaker Change: This five year agreement includes migrating the courts 44 counties in 200 courtrooms from on premises deployments to our SaaS offering.

Speaker Change: Our largest new SaaS deal in the quarter was what the state of North Carolina, where we extended the term of our existing core SaaS agreement for five years and expanded the agreement to add our solution for appellate courts.

Speaker Change: We also achieved key operational milestones in courts and justice during the quarter, including the successful go live of our enterprise Justice solution with the La County criminal courts.

This completed the countywide rollout across 35 locations in the nation's largest court.

Lynn Moore: We also had a significant cross-sell win under our state enterprise agreement in Arkansas for a public safety solution for Pulaski County, Arkansas. In the court space, we signed our first SAS flip of a statewide court system with the Idaho Supreme Court. This five-year agreement includes migrating the court's 44 counties and 200 courtrooms from on-premises deployments to our SAS office. Our largest new SAS deal of the quarter was with the state of North Carolina, where we extended the term of our existing court SAS agreement for five years and expanded the agreement to add our solution for appellate court. We also achieved key operational milestones in Courts and Justice during the quarter, including the successful go-live of our Enterprise Justice Solution with the Los Angeles County Criminal Courts.

Speaker Change: With our application platform, we secured a key SaaS win with the Virginia Department of education to upgrade its enterprise state regulatory system and modernize it citizen portal.

Speaker Change: The system will support the management of Virginia's child daycare programs, which are transitioning from the department of social services to the Bowie.

Speaker Change: During the fourth quarter, we also signed 172, new payments deals, bringing the total to 600 for the year.

Speaker Change: We also signed a new state enterprise contract in Maryland, following a competitive rebid of our expiring expiring contract as well as an extension of our Oklahoma Enterprise agreement.

Speaker Change: Finally, as noted on our last call. We completed the acquisitions of <unk> inspect and resource acts in October for a combined purchase price of approximately $37 million in cash and stock.

Lynn Moore: This completed the countywide rollout across 35 court locations in the nation's largest courts. With our application platform, we secured a key SAP win with the Virginia Department of Education to upgrade its enterprise state regulatory system and modernize its citizen portal. The system will support the management of Virginia's child day care programs, which are transitioning from the Department of Social Services to the DOE.

Speaker Change: We're pleased to see multiple early wins for application platform leveraging field operations and inspection capabilities that came to us through <unk>.

Speaker Change: Now I'd like Brian to provide more detail on the results for the quarter and our annual guidance for 2024.

Brian: Thanks Lynne.

Brian: Total revenues for the quarter were $489 million up six 3%.

Brian: Organic revenue growth, which also excludes COVID-19 related revenues in 2022.

Brian Miller: During the fourth quarter, we also signed 172 new payments deals, bringing the total to 600 for the year. We also signed a new state enterprise contract in Maryland following a competitive re-bid of our expiring contract, as well as an extension of our Oklahoma Enterprise Agreement. Finally, as noted on our last call, we completed the acquisitions of AR Inspect and ResourceX in October for a combined purchase price of approximately $37 million in cash and stock. We're pleased to see multiple early wins for our application platform, leveraging field operations and inspection capabilities that came to us through AR Inspect. Now, I'd like Brian to provide more detail on the results for the quarter and our annual guidance for 2024. Thanks, Lynn.

Brian: Six 1%.

Brian: The fourth quarter of 2022 included $3 $5 million of revenues from Covid related initiatives that are digital solutions division all of which ended in 2022.

Brian: Subscription revenues increased 11, 4% and organically rose 10, 8%.

Brian: Within subscriptions, our SaaS revenues grew 21, 7% to $141 million and grew organically 21, 2%, which is consistent with our near term growth expectations of a 20% CAGR in SaaS revenues through 2025.

Brian: Keep in mind that there is often a lag from the signing of a new SaaS deal or a flip to the start of revenue recognition that can vary from one to several quarters.

Brian: Because of this as well as the timing of SaaS renewals and related price increases.

Brian: This revenue growth both year over year and sequentially may fluctuate from quarter to quarter.

Brian: Transaction revenues grew 3% to $145 1 million and were up two 1% on organic basis.

Brian Miller: Total revenues for the quarter were $480.9 million, up 6.3%. Organic revenue growth, which also excludes COVID-related revenues in 2022, was 6.1%. The fourth quarter of 2022 included $3.5 million of revenues from COVID-related initiatives at our Digital Solutions Division, all of which ended in 2022. Subscription revenues increased 11.4% and organically rose 10.8%.

Brian: The lower growth rate in transaction revenues reflects in part the change from gross to net revenue recognition for payments under one of our state enterprise agreements.

Brian: Just a reminder, here about the seasonality of our transaction revenues are seasonality, it's really driven by two primary factors date determined deadlines, such as corporate filing deadlines are hunting seasons, and the number of business days, even with online transactions, we see a decline in volumes over the holidays.

Brian: Q2 is typically our highest volume quarter with peak outdoor seasons, along with tax season deadlines.

Led by Q1 due to the high volume of corporate filing services with Q1 deadlines Q4 will always lag with the holiday seasons, which lead to fewer business days.

Brian: While a smaller impact revenues from driver history Records are also stronger than the first half of the year.

Brian Miller: Within subscriptions, our SAS revenues grew 21.7% to $141 million and grew organically by 21.2%, which is consistent with our near-term growth expectations of a 20% CAGR in SAS revenues through 2025. Keep in mind that there is often a lag from the signing of a new SAS deal or a FLIP to the start of revenue recognition that can vary from one to several quarters because of this, as well as the timing of fast renewals and related price increases. Sass revenue growth, both year-over-year and sequentially, may fluctuate from quarter to quarter. Transaction revenues grew 3% to $145.1 million and were up 2.1% on an organic basis.

Brian: The sequential decline in transaction revenues this quarter reflects that typical seasonality.

Brian: SaaS deals comprised approximately 89% of our Q4, new software contract value compared to 86% last year.

Brian: Professional services revenue declined three 7% due to the absence of Covid related revenues and was flat organically.

Brian: As Lynn noted earlier public sector demand remains healthy and we are pleased with the strength of our new contract signings in Q4.

Brian: During the quarter, we added 156, new SaaS arrangements and converted 92 existing on premises clients to SaaS with a total contract value of approximately $137 million, an increase of 39% over last year in.

Brian: In Q4 of last year, we added 140, new SaaS arrangements and had 82, one premises conversions with a total contract value of approximately $99 million.

Brian: Also note that while the contract with the California State Parks includes our SaaS solution for outdoor recreation. It is not included in the new SaaS contract value because it is funded completely from transaction fees.

Brian Miller: The lower growth rate in transaction revenues reflects, in part, the change from gross to net revenue recognition for payments under one of our state enterprise agreements. Just a reminder here about the seasonality of our transaction revenues. Our seasonality is really driven by two primary factors, state-determined deadlines, such as corporate filing deadlines or hunting season, and the number of business days.

Brian: Overall, our pace of on premises conversions to SaaS continues at a steady pace with 338 flips in 2023 more.

Brian: More importantly, the total contract value associated with flips increased to $92 million compared to $76 million last year.

Brian: As we've discussed conversions are a significant growth driver over the next several years as we accelerate the pace of flips include.

Brian: Including transaction revenues expansions with existing clients and professional services total bookings increased 21, 2% on an organic basis.

Brian Miller: Even with online transactions, we see a decline in volumes over the holidays. Q2 is typically our highest volume quarter with peak outdoor seasons along with tax season deadlines, followed by Q1 due to the high volume of corporate filing services with the Q1 deadline. Q4 will always lag with the holiday seasons, which lead to fewer business days. However, while a smaller impact, revenues from driver history records are also stronger in the first half of the year. The sequential decline in transaction revenues this quarter reflects that typical seasonality. SAS deals comprised approximately 89% of our Q4 new software contract value, compared to 86% last year. Professional services revenue declined 3.7% due to the absence of COVID-related revenues and was flat organically.

Our total annualized recurring revenue was approximately $1 six 1 billion up seven 9% and organically grew seven 1%.

Brian: Operating margins were better than expected despite pressure from our ongoing cloud transition or.

Brian: Our non-GAAP operating margin was 22, 3% up 70 basis points from Q4 last year.

Brian: As Lynn discussed earlier merchant and inner fee merchant and interchange fees from our payments business under the gross revenue model have a meaningful impact on our overall margins as they are pass through to clients and are included in both revenues and cost of revenues, we paid merchant fees of approximately $35 million in Q4 and approximately 150.

Brian: $7 million for the full year of 2023.

Brian: Both cash flows from operations and free cash flow reached new highs for our fourth quarter at $147 4 million and $134 4 million respectively.

Brian Miller: As Lynn noted earlier, public sector demand remains healthy, and we're pleased with the strength of our new contract signings in Q4. During the quarter, we added 156 new SAS arrangements and converted 92 existing on-premises clients to SAS, with a total contract value of approximately $137 million, an increase of 39% over last year. In Q4 of last year, we added 140 new status arrangements and had 82 on-premises conversions with a total contract value of approximately $99 million.

Brian: Cash flow in the quarter was impacted by approximately $15 million of incremental cash taxes due to section 174 and for the full year those incremental cash taxes were approximately $127 million.

Brian: We continue to prioritize repayment of term debt as a use of our cash flow and in Q4, we reduced our term debt by $90 million, bringing our total repayments for the year to $345 million.

Brian: We ended Q4 with total outstanding debt of $650 million in cash and investments of approximately $183 million.

Brian: Our net leverage at quarter end was approximately.

Brian: <unk> 97 times trailing 12 months pro forma EBITDA.

Brian Miller: Also, note that while the contract with the California State Parks includes our SAS solution for outdoor recreation, it is not included in the new SAS contract value because it is funded completely from transaction fees. Overall, our pace of on-premises conversions to SaaS continues at a steady pace with 338 flips in 2023. More importantly, the total contract value associated with FLPS increased to $92 million compared to $76 million last year. As we've discussed, conversions are a significant growth driver over the next several years as we accelerate the pace of flipping. Including transaction revenues, expansions with existing clients, and professional services, total bookings increased 21.2% on an organic basis.

Brian: Our 2024 guidance is as follows we expect total revenues will be between $2 zero 95 billion and $2 $135 billion.

Brian: Midpoint of our guidance implies organic growth of approximately 8%.

Brian: We also expect that merchant fees will be down slightly and that implied growth excluding merchant fees would be approximately 90 basis points higher.

Brian: We expect GAAP diluted EPS will be between $5 17, and $5 37, and may vary significantly due to the impact of discrete tax items on the GAAP effective tax rate.

Brian: We expect non-GAAP diluted EPS will be between $8 90, and $9 10.

Brian: We expect our free cash flow margin will be between 17% and 19%, including the impact of incremental cash taxes related to section 174 of approximately $50 million.

Brian: Other details of our guidance are included in our earnings release and in the Q4 earnings deck posted on our website.

Brian: Now I'd like to turn the call back over to Lynn.

Lynn Moore: Thanks, Brian.

Lynn Moore: We enter 2024 with tremendous optimism and confidence in the year ahead and beyond as we execute our mid to long term strategy supporting our Tyler 2030 vision.

Brian Miller: Our total annualized recurring revenue was approximately $1.61 billion, up 7.9%, and organically grew 7.1%. Operating margins were better than expected despite pressure from our ongoing cloud transition. Our non-gap operating margin was 22.3%, up 70 basis points from Q4 last year. As Lynn discussed earlier, merchant and interchange fees from our payments business under the gross revenue model have a meaningful impact on our overall margin. As they are passed through to clients and are included in both revenues and cost of revenue, we paid merchant fees of approximately $35 million in Q4 and approximately $157 million for the full year of 2023. Both cash flows from operations and free cash flow reached new heights for the fourth quarter, at $147.4 million and $134.4 million, respectively. However, cash flow in the quarter was impacted by approximately $15 million of incremental cash tax.

Lynn Moore: We expect to return trajectory trajectory of consistent operating margin expansion in 2024, as we increasingly realize the benefits of our cloud optimization initiatives and execute our planned exits from our two proprietary data centers in 2024 and 2025.

Lynn Moore: We continue to leverage our competitive strengths and demonstrate the value of our deep domain expertise across the broadest most integrated offerings that are uniquely focused on the public sector, while empowering our clients who serve the public to Tyler's next generation cloud applications.

Lynn Moore: Finally, we are proud to be recognized by the by government Technology magazine as the <unk> 100 company for 2024.

Lynn Moore: This marks our eighth consecutive year being recognized for our work and making a difference for government through technology.

Now we'd like to open the line for Q&A.

Speaker Change: Thank you we will now begin the question answer session to answer your question into the question Keith. Please press star one on your Touchtone phone if youre using a speakerphone. Please pick up your handset and then <unk> and the number one to destroy your question. Please press the star.

Speaker Change: And then number one again.

Speaker Change: As a reminder, please limit your question to one and one follow up question. So we may stay within the allotted time.

Brian Miller: Due to Section 174, and for the full year, those incremental cash taxes were approximately $127 million. We continue to prioritize repayment of term debt as a use of our cash flow, and in Q4, we reduced our term debt by $90 million, bringing our total repayments for the year to $345 million. We ended Q4 with total outstanding debt of $650 million and cash and investments of approximately $183 million. Our net leverage at quarter end was approximately 0.97 times trailing 12-month Proforma EBIT. Our 2024 guidance is as follows. We expect total revenues to be between $2.095 billion and $2.135 billion. The midpoint of our guidance implies organic growth of approximately 8%. We also expect that merchant fees will be down slightly and that implied growth excluding merchant fees would be approximately 90 basis points higher. We expect GAAP diluted EPS to be between $5.17 and $5.37 and may vary significantly due to the impact of discrete tax items on the GAAP effective tax rate. We expect non-GAAP diluted EPS to be between $8.90 and $9.10.

Speaker Change: We will post close.

Post momentarily to assemble Alastair.

Our first question comes from the line of Ken Wong.

Ken Wong: Please go ahead.

Ken Wong: Fantastic Thanks for taking my question.

Ken Wong: I wanted to maybe just touch on the accelerating pace of flips going into 'twenty four and on one hand, I think that's a fantastic initiative. You guys are also dialing back or at least accelerating the pace of sales and marketing growth SG&A.

Ken Wong: <unk>, maybe mid mid single digit I guess, what's the confidence in being able to accelerate that pace. While also maybe not not leaning in as aggressively on the on the sales and marketing side.

Ken Wong: Yes.

Ken Wong: Well really a lot of the.

Ken Wong: The movement it slips is.

Ken Wong: It doesn't require a lot of sales and marketing efforts a lot of that is done through our.

Ken Wong: Inside sales organization through our existing.

Ken Wong: Client relationship managers.

And so it doesn't require a great deal of of.

Ken Wong: The increase in sales and marketing expenses.

Ken Wong: And generally we feel like.

Ken Wong: Yes.

Ken Wong: Mid single digit growth in sales and marketing.

Ken Wong: A lot of efficiencies do more cross selling.

Ken Wong: Great more synergies across our sales organization with more products in the same sales reps bags.

Ken Wong: So those two.

Ken Wong: Two factors don't really conflict with each other but.

We believe the resources, we have in place really.

Ken Wong: Our are sufficient to drive the pace of flips that we expect to see over the next several years, yeah. Just a follow up on that I mean, when we outlined our Tyler 2030 vision. We obviously, we've got some goals around flips over the next six seven years and we also have goals on on some of our G&A initiatives. So I think those are both tracking right now in line.

Lynn Moore: We expect our free cash flow margin will be between 17 and 19 percent, including the impact of incremental cash taxes related to Section 174 of approximately $50 million. Other details of our guidance are included in our earnings release and in the Q4 earnings deck posted on our website. Now, I'd like to turn the call back over to Lynn.

Ken Wong: And with our expectations going forward.

Okay, Perfect and then just a quick follow up in terms of the hosting efficiencies.

Ken Wong: Would you say, we peaked in terms of kind of extracting the efficiencies. There are there is still a little room to go.

Unknown Executive: Thanks, Brian. We enter 2024 with tremendous optimism and confidence for the year ahead and beyond as we execute our mid- to long-term strategy supporting our Tyler 2030 vision. We expect to return to a trajectory of consistent operating margin expansion in 2024 as we increasingly realize the benefits of our cloud optimization initiatives and execute our planned exits from our two proprietary data centers in 2024 and 2025. We continue to leverage our competitive strengths and demonstrate the value of our deep domain expertise across the broadest, most integrated offerings that are uniquely focused on the public sector, while empowering our clients who serve the public through Tyler's next-generation cloud applications. Finally, we are proud to be recognized by Government Technology Magazine as a GovTech 100 company for 2024. This marks our eighth consecutive year being recognized for our work in making a difference for government through technology.

Ken Wong: There's still room to go.

Theres a lot that goes into that.

Ken Wong: We're continuing to.

Ken Wong: To optimize our products and find ways for them to run more efficiently on the other side of it. We're also seeing continuing to make strides in our version consolidation, particularly with our major product lines. We've seen over the last 12 months significant version consolidation in two of our larger flagship.

Ken Wong: <unk>.

Ken Wong: We will continue to contribute efficiencies as we go forward and as well as with some of the other products that are out there.

Speaker Change: Perfect. Thanks, a lot guys.

Speaker Change: Thank you. Our next question comes from the line of second Kalia of Barclays. Please go ahead.

Second Kalia: Okay, Great Hey, guys. Thanks for taking my questions here.

Second Kalia: Yes.

Second Kalia: Lynn maybe maybe for you just along those lines I was there.

Kalia: Wondering if you could just go one level deeper into the latest agreement with AWS.

Kalia: And maybe the question is how does the new agreement maybe change what you had previously and and how can it sort of continue to support the profitability growth that we are clearly seeing.

Kalia: Yes, those are good questions.

As you know we signed an extension that now runs through the end of 31.

Kalia: Which runs through our pilot 2030 initiative, which is great at it obviously just further deepen those relationships we have.

Unknown Executive: Now we'd like to open the line for Q&A. Thank you. We will now begin the question and answer session. To enter a question into the question queue, please press star one on your touchtone phone. If you are using a speakerphone, please pick up your handset and then press the star key and the number one.

Kalia: Made certain commitments to AWS around migrating our existing Tyler clients are net new clients into AWS.

Kalia: <unk> has also made commitments back to us around certain pricing.

Kalia: Commitments innovation marketing things like that.

Kalia: Not really at Liberty to go into the specifics of what those those.

Ken Wong: To withdraw your question, please press the star key and the number one again. As a reminder, please limit your question to one and one follow-up question, so we may stay within the allotted time. We'll pause for a moment. We'll pause momentarily to assemble our roster. The first question comes from the line of Ken Wong of Oppenheimer & Co. Please go ahead.

Kalia: Those details and those commitments and pricing concessions are.

Kalia: But what I can say is that AWS has been a great partner for us I couldnt be more happy with the relationship that we started in the fall of 2019.

Kalia: And this extension I think further in.

Kalia: Embraces that.

Kalia: Yes.

Kalia: Theyre very collaborative with us and are eager to work with us to help us find ways to lower our costs. So they are a true partner similar to the way we view our clients in the public sector as partners.

Lynn Moore: Fantastic. Thanks for taking my question. I wanted to maybe just touch on the accelerating pace of flips going into 24. On the one hand, I think that's a fantastic initiative. You guys are also dialing back or at least decelerating the pace of sales and marketing growth or SG&A. I guess I'm modeling maybe mid-single digits.

Kalia: Where they view us and I think part of it part of the difference also in our relationship now is it's just it's more mature and we're a lot farther along in our cloud journey than we were when we first signed it if you remember we first signed the agreement we were still trying to figure out how our products will relate would really operate in AWS and we spent a long time trying to just figure out the.

Brian Miller: I guess what's the confidence in being able to accelerate that pace while also maybe not leaning in as aggressively on the sales and marketing side? Well, really, a lot of the movement in CLPS doesn't require a lot of sales and marketing efforts. A lot of that is done through our inside sales organization, through our existing client relationship managers, and so it doesn't require a great deal of increase in sales and marketing expenses, a lot of product in the same sales rep's bag. So, those two factors don't really conflict with each other, but...

Kalia: The cost of just moving simply lift and shift and now we've transformed that we've done all of that and it's how can we make them run even more efficiently in the private clouds and public clouds.

Great partner excited that they're on it.

Kalia: This journey with us for the next at least eight years.

Speaker Change: No that's great that sounds like a win win for everybody.

Lynn Moore: I believe the resources we have in place are really sufficient to drive the pace of flips that we expect to see over the next several years. Yeah, just to follow up on that, I mean, when we outlined our Tyler 2030 vision, we obviously have some goals around flips over the next six, seven years, and we also have goals on some of our G&A initiatives, so I think those are both tracking right now in line and with our expectations going forward. Okay, perfect.

Speaker Change: I'll stick to the one follow up and Brian maybe it's for you.

Speaker Change: Great to see Tyler reach the 17% to 19% free cash flow target I think one year ahead of schedule and you correct me there from Rommel.

Brian: I know, we're not we're not speaking to 2025 necessarily on this call, but maybe maybe conceptually how do you sort of think about free cash flow margin expansion versus EBIT margin expansion should those two things move large largely in the same range or is there any reason to.

Lynn Moore: And then just a quick follow-up on terms of hosting efficiencies. I guess, would you say we've peaked in terms of kind of extracting the efficiencies there, or is there still a little room to go? I think there's still room to go, and there's a lot that goes into that. We're continuing to optimize our products and find ways for them to run more efficiently. On the other side of it, we're also continuing to make strides in our version consolidation, particularly with our major product lines. We've seen, over the last 12 months, significant version consolidation in two of our larger flagship products, and that will continue to contribute efficiencies as we go forward, as well as with some of our other products that are out there. Thanks a lot, guys.

Brian: That one should expand faster than the other does that makes sense.

Yes, yes, I think in the near term they likely expand in the same range and.

Brian: Particularly I think you see that in 2024 most likely.

Brian: Especially because we still although it's lessening and lessons over the next several years Theres still has an impact of the section 174 change it was $127 million impact on our free cash flow in 2023, it's about a $50 million impact in 2024, and then it will decline.

Again over the next.

Four years after that until it sort of reaches equilibrium, but I think in the longer term, we would expect that free cash flow growth would be higher.

Saket Kalia: Thank you. Our next question comes from the line of Saket Kalia of Barclays. Please go ahead.

Saket Kalia: Okay, great. Hey guys, thanks for taking my questions here. Lynn, maybe for you, just along those lines, I was wondering if you could just go one level deeper into the latest agreement with AWS. And maybe the question is, how does the new agreement maybe change what you had previously? And how can it sort of continue to support the profitability growth that we're clearly seeing? Yeah, those are good questions.

Brian: <unk>.

Brian: If you take out that section 174 impact.

Brian: Because.

Brian: A couple of things.

Brian: We continue to get leverage out of Capex, and especially as we exit our data centers, where a significant amount of our capex has been focused in recent years.

Brian: As we continue to.

Brian: And become more efficient around how we manage office facilities.

Brian: And our other the other capex associated with our business and actually Youll see we have.

Brian: Lower expectation for Capex around.

Lynn Moore: As you know, we signed an extension that now runs through the end of 31, which runs through our Tyler 2030 initiative, which is great. It, obviously, you know, just further deepens those relationships. We've made certain commitments to AWS around migrating our existing Tyler clients, and our net new clients into AWS. You know, AWS has also made commitments to us around certain pricing commitments, innovation, marketing, things like that. I'm not really at liberty to go into the specifics of what those details and those commitments and pricing concessions are, but what I can say is that AWS has been a great partner for us. I couldn't be more happy with the relationship that we started in the fall of 2019.

Brian: Software development going forward as well.

Brian: But most importantly, the cash flow characteristics of the recurring revenues.

Brian: The SaaS revenues paid in advance and create deferred revenue.

Brian: The transaction revenues generally getting paid at the time of the transaction. So there arent big receivables associated with those.

Brian: As those businesses grow those.

Brian: Those revenue streams grow.

Brian: They should have.

Brian: The.

Brian: Have caused our cash flow to grow faster than the.

Brian: The the.

Brian: The EBIT.

Speaker Change: Very helpful. Thanks, guys.

Speaker Change: Thank you. Our next question comes from the line of Joshua Reilly from Needham. Please go ahead.

Joshua Reilly: Alright, Thanks for taking my questions and nice job on the quarter here.

Joshua Reilly: Overall, the demand environment seems very strong, but the initial revenue guidance for 2024 was a bit below the street at the midpoint and implies a little greater acceleration in 2025 to hit the mid term target for revenue of $2 35 billion. How are you thinking about the progression to hit those 2025 target now given the initial revenue guidance.

Lynn Moore: And this extension, I think, further embraces that when I, you know, they're very collaborative with us and are eager to work with us to help us find ways to lower our costs. So they are a true partner, similar to the way we view our clients in the public sector as partners. That's the way they view us.

Joshua Reilly: For the year.

Speaker Change: Yes, Josh.

Josh: Right now.

Speaker Change: I would say I'm confident in our in our both our 2025 and our 2030 projections just from overall, what I'm seeing in the business.

Lynn Moore: And I think part of the, part of the difference also in our relationship now is that it's just, it's more mature, and we're a lot farther along in our cloud journey than we were when we first signed the agreement. You know, when we first signed the agreement, we were still trying to figure out how our products were really going to operate in AWS. And we spent a long time trying to just figure out the costs of just moving, you know, simply lifting and shifting.

Speaker Change: As Brian remarked pointed out in the opening remarks.

Speaker Change: A couple of things impact.

Speaker Change: Revenue growth this year and one really is the flat to slightly declining.

Speaker Change: Fee growth. So when you pull out merchant fees, our growth is really more in the closer to mid <unk>, probably 90 394, it's about 90 basis points.

Lynn Moore: And now we've transformed and we've, we've, we've done all that. And it's, it's how can we make them run even more efficiently in the private clouds, I mean, in the public cloud. So great partner, excited that they're on this journey with us for the next at least eight years. No, that's great. That sounds like a win-win for everybody.

Speaker Change: And those tend to fluctuate and part of that is as Brian mentioned due to the to one of our large state enterprise contracts flipping from.

Speaker Change: The gross to net model.

Speaker Change: But overall Thats super helpful.

Speaker Change: Yes.

Speaker Change: Overall as you pointed I mean, what we're seeing in the markets right now the demand the number of new business deals. We are signing our competitive position wins against really some key large tier one competitors is are the things that really give me a lot of confidence.

Brian Miller: I'll stick to the one follow-up, and Brian, maybe it's for you. Great to see Tyler reach the 17% to 19% free cash flow target. I think one year ahead of schedule, and you can correct me there if I'm wrong. I know we're not necessarily speaking to 2025 necessarily on this call, but maybe conceptually, how do you sort of think about free cash flow margin expansion versus EBIT margin expansion? Should those two things move largely in the same range, or is there any reason to think that one should expand faster than the other?

Speaker Change: Recently had our national sales meeting really dive deep into the sales forecast not only for the next 12 to 24 months, but even beyond.

Speaker Change: Right now things as things look pretty good.

Speaker Change: Got it and then just a quick follow up the Idaho courts deal that seems like an important deal in terms of being the first I believe its the first state to migrate out of the 16 or 17 that you have on premise Keith management installations. Do you think this is a tipping point or do you think that the other 16 or 17 states are still a couple of years away.

Brian Miller: Does that make sense? Yeah, yeah, I think in the near term, they will likely expand in the same range. And particularly, I think you will see that in 2024, most likely. Especially because we still have, although it's lessening and lessening over the next several years, there still is an impact of this Section 174 change. It had a $127 million impact on our free cash flow in 2023. It's about a $50 million impact in 2024. And it'll decline, [inaudible] If you take out that Section 174 impact because of a couple things. We've continued to get leverage out of CapEx, and especially as we exit our data centers, where a significant amount of our CapEx has been focused in recent years as we continue to become more efficient around how we manage office facilities, and our other CAPEX associated with our business, and actually, you'll see we have a lower expectation for CapEx around software development going forward as well. But most importantly, the cash flow characteristics of the recurring revenues, the [inaudible] Thank you. Our next question comes from Joshua Reilly from Needham. Please go ahead.

Speaker Change: From migrating thanks, yes.

Speaker Change: Yes, I think it's hard to say Joshua.

Speaker Change: Every all of our Submarkets are little bit different in the courts market for sure and it's an area where.

People, maybe a little reluctant to go first so getting Idaho, there and going is are going to be on it.

Speaker Change: I think as we successfully pull off that deal I do think it will trigger more throughout the course community.

Speaker Change: As you know everything we do is reference business, but particularly these larger statewide deals.

Speaker Change: Our state Court business I think all the other states are Washington, Idaho, So we need to do what we do best which is go and execute on the business and go make it.

Speaker Change: Great experience and I do think that will that will be a domino that will that will ripple throughout the client base.

Speaker Change: Got it thanks, guys nice job.

Speaker Change: Okay.

Speaker Change: Thank you. Our next question comes from the line of Terry Tillman of tourists Securities. Please go ahead.

Terry Tillman: Great. Good morning. This is <unk> on for Terry I. Appreciate you taking the question I also just wanted to ask one on the Idaho stakeholder deal first.

Speaker Change: Could you maybe just breakdown how we should think about this deal playing out in the model and maybe what the timeline looks like we're getting a large court system like this live in terms of.

Speaker Change: The court rooms in the counties that kind of how it all works with getting to cloud.

Joshua Christopher Reilly: All right, thanks for taking my questions and a nice job on the quarter here. Overall, the demand environment seems very strong, but the initial revenue guidance for 2024 was a bit below the street at the midpoint and implied a little greater acceleration in 2025 to hit the midterm target for revenue of $2.35 billion. How are you thinking about the progression to hit this 2025 target now, given the initial revenue guidance for the year? Yeah, Josh, right now, I would say I'm confident in both our 2025 and our 2030 projections just from overall what I'm seeing in the business. As Brian remarked, or pointed out in his opening remarks, you know, a couple things impact revenue growth this year, and one really is the flat to slightly declining merchant fee growth. So when you pull out merchant fees, you know, our growth is really more in the closer to mid nines, probably 9394. It's about 90 basis points.

Speaker Change: Yes, it's going to take some time for the full for the full impact of this deal I think we're going to reckon.

Speaker Change: Recognize probably about 50% of the uplift revenue in 2024, and what we really see the full impact in 2025.

Speaker Change: All of our core businesses are large projects, we talked about the law criminal courts go live.

Speaker Change: Probably one of the most successful go lives we've had in Tyler's history.

Speaker Change: This will this will mirror that and it'll be our first statewide flip.

Speaker Change: But from a timing perspective revenues uplift all that we'll get we'll get about 50% of it and in 2024 and 2025, we'll have the full run rate I think about mid years.

Speaker Change: Does that mid years.

Speaker Change: When we expect to.

To start to bring bringing them up into AWS.

Speaker Change: <unk>.

Speaker Change: That uplift is included in our.

Speaker Change: Our guidance for the year, but.

Speaker Change: It's a couple of million dollars uplift from what they were paying in maintenance.

Speaker Change: Got it that makes sense and then just on a follow up I wanted to ask one around transaction revenues could you maybe just talk a little more about the impact of payments from customers slipping gross to net in the quarter. I think you mentioned the flip in front of the state enterprise agreements I'm, just curious on how that impacted overall revenue in that segment.

Lynn Moore: And those tend to fluctuate, and part of that is, as Brian mentioned, due to one of our large state enterprise contracts flipping from the gross to net model. But overall, overall, as you pointed out, I mean, what we're seeing in the markets right now, the demand, the number of new business deals we're signing, our competitive position, wins against really some key large tier one competitors are the things that really give me a lot of confidence. We recently had our national sales meeting, and really dived deep into the sales forecast, not only for the next 1224 months but even beyond. And, you know, right now, things things look pretty good. Got it.

Speaker Change: Yes.

Speaker Change: As we've talked about one of our state contracts actually mid year changed from gross to net.

Speaker Change: We had that impact in.

Speaker Change: The second half of this year and it also impacts us in the first half of next year.

Speaker Change: I think the overall impact for the second half of the year within the $9 million to $10 million range.

Speaker Change: In the first half of next year because.

Speaker Change: I believe somewhere in a similar range.

Speaker Change: And.

Speaker Change: That was probably.

Speaker Change: Yes.

Speaker Change: Split between Q3 and Q4, but.

Speaker Change: Probably a little bit more of that impact was in Q3.

Lynn Moore: And then just a quick follow-up, the Idaho courts deal, that seems like an important deal in terms of being the first, I believe it's the first state to migrate out of the 16 or 17 that you have on-premise case management installations. Do you think this is a tipping point? Or do you think that the other 16 or 17 states are still a couple years away from migrating?

Speaker Change: But there was a several million dollar impact on the quarter.

Speaker Change: Great. Thank you.

Speaker Change: Thank you. Our next question comes from the line of Matt <unk>.

Matt: <unk>. Please go ahead.

Matt: Yes. Good morning, Thanks for taking my question.

Matt: On the deal with the California.

Matt: Parks.

Matt: Division there talked about it being exclusively funded through transaction revenue.

Lynn Moore: Thanks. Yeah, I think it's hard to say, Joshua. I think, you know, all of our little sub markets are a little bit different. In the courts market, for sure. That's, it's an area where people may be a little reluctant to go first.

Matt: Maybe just help us think about kind of.

Matt: I guess not only maybe what the contractual minimums might be there what's sort of embedded in guidance.

Matt: How much potential upside is there to what's embedded in guidance and then maybe more importantly down the road do you envision other states trying to take an approach more like this where there's less contracted SaaS revenue and more funded through the program itself.

Lynn Moore: So getting Idaho there and going is going to be a big deal, and I think as we successfully pull off that deal, I do think it will cause more throughout the courts community. You know, as you know, everything we do is a reference business, but particularly these larger, you know, statewide deals, our state, our state court business. I think all the other states are watching Idaho. So we need to do what we do best, which is go and execute on the business and make it a great experience. And I do think that will be a domino that will ripple throughout the client base. Got it.

Speaker Change: Yes, Matt I'll start and Brian you may jump in.

There are a couple of things that are real exciting about that California State parks deal. One obviously is the largest transaction deal in Tyler's history.

The second thing is as you point out it validates this sort of self funding model.

Speaker Change: Not a surprise everybody anybody who reads the journal that California has significant.

Lynn Moore: Thanks, guys. Nice job. Thank you. Our next question comes from the line of Terry Tillman of TruViz Securities. Good morning, team. This is Connor Basarela on for Terry.

Speaker Change: <unk>, a significant budgetary issues right now and so.

Speaker Change: Going to them with a self funded model on this type of contract is really about the only way they can do it.

Connor Basarela: Appreciate you taking the question. I also just wanted to ask one on the Idaho State Court deal. First, could you maybe just break down how we should think about this deal playing out in the model and maybe what the timeline looks like for getting a large court system like this live in terms of, you know, the courtrooms in the counties and kind of how it all works with getting to the cloud? Yeah, it's going to take some time for the full impact of this deal to be felt. I think we're going to recognize probably about 50% of the uplift revenue in 2024, and we'll really see the full impact in 2025. You know, all of our quartz businesses are large projects. We talked about the LA Criminal Quartz Go Live, probably one of the most successful Go Lives we've had in Tyler's history.

Speaker Change: And so again, it validates that that model of that part of our business.

Speaker Change: Because it's self funded.

Speaker Change: The impact going forward.

Speaker Change: We will be recognizing a lot more expense in 2024, it's actually a little bit of a drag on margins in 2024, but ramps up significantly in 'twenty five and continues that ramp up with margin expansion all the way through the end of the contracts 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 just to say your point is good because it is at a fixed debt.

Speaker Change: SaaS fee that.

Speaker Change: The transaction revenues are currently an estimate and we think we have a pretty good idea of what.

Lynn Moore: This will mirror that, and it'll be our first statewide flip. But from a timing perspective, revenues, uplift, all that, we'll get about 50% of it in 2024, and in 2025, we'll have the full run rate. Yeah, I think about mid-years because that mid-year is when we expect to start to bring them up into AWS, and that Uplift is included in our... Our guidance for the year, but it's a couple million dollar uplift from what they were.

Brian: Volumes will be in but.

Speaker Change: But they may vary from that and it will.

Speaker Change: Currently in the plan for this year.

Speaker Change: We expect.

Speaker Change: A few million dollars of revenues.

Speaker Change: And then it ramps up to that.

Speaker Change: North of $20 million.

Speaker Change: 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.

Speaker Change: But yes, it is subject to to variances in subject to seasonality as well. Unlike a regular SaaS contract that is.

Speaker Change: Pro rata revenue recognition every quarter. This will also have seasonality in it around.

Brian Miller: Yeah, that makes sense. And then just on a follow-up question, I just want to ask one around transaction revenues. Could you maybe just talk a little more about the impact of payments from customers flipping from gross to net in a quarter? I think you mentioned the flip in one of the state enterprise agreements. I'm just curious about how that impacted, you know, overall revenue in that segment.

Speaker Change: Yes.

Speaker Change: As we do.

Speaker Change: Many of our outdoor transaction revenues.

Speaker Change: Okay very helpful. And then maybe just one clarification around the AWS extension.

Speaker Change: Yes.

As you continue to scale that business are we still at maybe a sub scale type of car.

Brian Miller: As we've talked about, one of our state contracts, actually, changed from gross to net, so we had that impact in the second half of this year, and it also impacts us in the first half of next year. I think the overall impact for the second half of the year was in the $9 to $10 million range. The first half of next year is, I believe, somewhere in a similar range, and that was probably split between Q3 and Q4, but probably a little bit more of that impact was in Q3. But it was a several million dollar impact on the course.

Speaker Change: Cost relative to the revenue running through that system.

Speaker Change: 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.

Speaker Change: No I think theres still more leverage.

Speaker Change: And I think generally going forward, we make certain commitments to AWS.

Speaker Change: And we're making those commitments based on projections.

Speaker Change: But we're continuing as I mentioned earlier to further optimize our products.

Speaker Change: Further reduce our versions.

Speaker Change: I think the leverage in our our cloud operations still has quite a bit of room to go.

Brian Miller: Great, thank you. Thank you. Our next question comes from the line of Matt VanVliet of BTIG. Please go ahead.

Speaker Change: Great. Thank you very helpful.

Speaker Change: Matt I would point out one other thing about the California contract.

Matthew David VanVliet: Yeah, good morning. Thanks for taking the time to ask the question. I guess in the deal with the California Parks Division there, you talked about it being exclusively funded through transaction revenue. Maybe just help us think about kind of, I guess, not only maybe what the contractual minimums might be there, but what's sort of embedded in guidance, how much potential upside there is to what's embedded in guidance, and then maybe more importantly down the road, do you imagine other states trying to take on an approach more like this where there's less Yeah, Matt, I'll start.

Speaker Change: As we mentioned on the call.

This is a significant expansion of what is already an existing agreement, we have with California under.

Speaker Change: With USD direct which we acquired.

Speaker Change: After we acquired Nics. So they are currently.

Speaker Change: 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.

Speaker Change: It has expanded and especially because it now includes payment processing.

Speaker Change: Okay. Thank you.

Gabriela Borges: Thank you. Our next question comes from the line of Gabriela bushes of Goldman Sachs. Please go ahead.

Speaker Change: Hi, This is <unk> on for Gabriela.

Lynn Moore: Brian, you may jump in. There are a couple of things that are really exciting about that California State Parks deal. One, obviously, is that it's the largest transaction deal in Tyler's history. The second thing is, as you point out, it validates this sort of self-funding model. It's not a surprise to anybody who reads the journal that California has significant deficits and significant budgetary issues right now.

Speaker Change: Another question on the number of conversions conversions have been in kind of the 70 to 100 range per quarter for the past few years, how should we think about the ramp converting maybe hundreds of customers a quarter and are you sharing any expectations for number of slots in 2024.

Speaker Change: So I'll start.

Lynn Moore: Going to them with a self-funded model on this type of contract is really about the only way they can do it. And so, again, it validates that model, that part of our business. Because it's self-funded, the impact going forward, we will be recognizing a lot more expense in 2024. It's actually a little bit of a drag on margins in 2024, but it ramps up significantly in 2025 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 [inaudible] The transaction And it'll currently be in the plan for this year, we expect. [inaudible] North of 20 million dollars. [inaudible]...

Speaker Change: You're right Kelly.

Speaker Change: Our flips in Q4 were actually up about 12% over Q4 last year.

Speaker Change: We're not putting out guidance as far as I know, Brian on specific flip deal count Theres 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 overtime.

Speaker Change: There's things that go into the into the flips and a lot of it is.

Speaker Change: We have to get our customers on more modern versions and when I talk about our version collapse efforts that have been.

Speaker Change: <unk> been going on for several years, but some of the strides that we have been making as we continue to make strides on that it will make.

Speaker Change: It will accelerate it will help accelerate the pace of flips going forward.

Brian Miller: Many of our outdoor transaction reps are okay, and very helpful. 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 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? No, I think there's still more leverage.

Speaker Change: I just would add that it's also important I think to look at the.

Speaker Change: The size of the flips in the dollar value.

Speaker Change: For example, this quarter with the signing the Idaho.

Speaker Change: State Court deal.

Speaker Change: Significantly bigger than most of our our typical flips so.

Speaker Change: Even though that only counts as one of the 92.

Speaker Change: The dollars were pretty meaningfully different and I think our prepared remarks, we talked about the.

The size of the increase in the dollar value of the flip contracts.

Speaker Change: And so in general I would expect that as we go forward over these next.

Lynn Moore: 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, you know, reduce our versions. I think the leverage in our cloud operations still has quite a bit of room to go. Great, thank you very much, with USEDirect, which we acquired.

Speaker Change: A few years so we'll.

Speaker Change: We will see more of our larger clients start to move and so it has a bigger impact on that uplift.

Speaker Change: And the dollar size so.

Speaker Change: Obviously, each flip is not created equal.

Speaker Change: And in general we've got more of our large clients that are still to be migrated.

Speaker Change: Thank you that's helpful quick follow up on that Virgin Virgin control.

Speaker Change: You mentioned last quarter, you had the goal kind of by the end of 2020 or early 2024 have only supporting two of the most recent versions of each product where are you at in kind of achieving that goal.

Brian Miller: 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 revenues as that has expanded and especially because it now, Okay, thank you. Thank you. Our next question comes from the line of Gabriela Borges of Goldman Sachs. Please go ahead. Hi, this is Callie Valente on behalf of Gabriela

We made a lot of progress.

Speaker Change: In particular, if you look at our enterprise ERP product for example.

Speaker Change: At the end of last year, we only had about 23% of that client base.

Speaker Change: The more modern version at the end of this year end of 2023.

Speaker Change: That was up to 86%.

Speaker Change: We've made similar strides with our enterprise Justice solution. So just generally across the board.

Speaker Change: We're tracking on that.

Callie Valente: 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 the number of flips in 2024? So I'll start. You're right, Callie.

Speaker Change: Im not sure if I remember, saying at the end of 2025 I think it was more 'twenty six but we're I think we're actually.

Speaker Change: Head of the pace that I was.

Speaker Change: I was thinking about and discussing maybe 18 months 24 months ago.

Speaker Change: Thank you.

Speaker Change: Yes.

Thank you. Our next question comes from the line of Rob.

Rob: Please go ahead.

Rob: Great. Thanks, guys.

Lynn Moore: 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 flip deal counts. 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 over time. There are things that go into the flips, and a lot of it is that 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 help accelerate the pace of flips going forward. I just would add that it's also important, I think, to look at the size of the flips and the dollar value.

Rob: First question is for you just around public safety.

Speaker Change: Must be gratifying.

Rob: See the way the business is working after many years.

Rob: Through the new World acquisition.

Rob: And now moving to cloud faster than expected. So my question is.

It seems like that would be good for Tyler just would be curious to hear your view on.

Any potential shift in the competitive landscape that that might cause meaning.

Rob: Some of your legacy typical competitors that we know in this space are they properly caught enabled and Conversely are you seeing new competitors in the market and public safety as these deals shift more to cloud first and then I had a quick follow up for Brian.

Rob: Yes.

Rob: It is it.

Speaker Change: It's actually it's very interesting and to your point gratifying to see this shift in and we've been anticipating it but we just didn't know when it was going to happen.

Brian Miller: So, for example, this quarter with the signing of the Idaho state court 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. In, I think, our prepared remarks, we talked about 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 these next few years, we'll see more of our larger clients start to move, and so it has a bigger impact on that uplift and the dollar size. And, in general, we've got more of our large clients that are still to be migrated. Yeah, thank you. That's very helpful.

Speaker Change: I think we mentioned on the in the opening remarks about 46% of our Q4 deals were cloud deals and public safety.

Speaker Change: It's up from 16% in Q2.

As we look out next year, we think it is going to cross 50% in when we're sort of planning on a little north of 50%.

We're we're taking an approach that now with public safety as we see.

Speaker Change: The market receptive to start to be in its approach that we took generally with Tyler going back four or five years, which is going forward, we really want to be leading to the cloud and we think the market is ready.

Lynn Moore: Um, quick follow up on that version, version control point. You mentioned last quarter that 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? 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. At the end of 2023, 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. Thank you. So my question is, it seems like that would be good for Tyler.

Speaker Change: As it relates to competitors.

Speaker Change: 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.

Speaker Change: <unk> been a little bit smaller competitors.

Speaker Change: They have had their own set of issues to deal with.

Speaker Change: I think that we are well positioned with our cloud strategy.

Speaker Change: In public safety.

Speaker Change: To take advantage of this market shift we had and we have new leadership at public safety, if you've been on a website you might've seen a new division president that came on last year.

Speaker Change: Came from outside of Tyler He is actually has.

Speaker Change: <unk> been a part of leading companies through a cloud transition. So it's exciting to have him there have him up and Troy with the people in and really sort of helping to lead those efforts. So I like where we are like where we sit.

Speaker Change: And to reiterate your words.

Speaker Change: As gratifying to see these early results but.

A lot of things I'm going to caution us a lot of a lot of things to go execute on in the future, but it is.

Speaker Change: It is good to see this the shift starting to happen in public safety.

Speaker Change: Okay I appreciate that thank you and then.

Speaker Change: Brian just a question around the R&D expense guide.

Brian: For the year.

Brian: Implying kind of mid teens year over year growth.

Brian: Just can you just talk about what some of the biggest drivers of that are within that R&D line. Thanks.

Robert Cooney Oliver: I just would be curious to hear your view on any potential shift in the competitive landscape that that might cause, meaning, you know, some of your, you know, legacy, typical competitors that we know in this space, are they properly cloud-enabled? And conversely, are you seeing new competitors in the market for public safety as these deals shift more to the cloud first? And then I had a quick follow-up for Brian.

Brian: Yes, I mean I think it.

Brian: It continues to be a lot of development around.

Brian: The.

Brian: Around the cloud and <unk>.

Brian: New.

Brian: Our optimization and efficiency efforts around.

Brian: Optimizing our products for the cloud there is a shift from.

Brian: Some R&D that was previously being capitalized, especially around some of the cloud projects.

Lynn Moore: Yeah Rob, 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 that about 46% of our Q4 deals were cloud deals in public safety. That's up from 16% in Q2.

Brian: We will now be expense. So a lot of it is the same people, but now running through expense as opposed to being capitalized.

Brian: <unk>.

Brian: Thats.

Brian: Obviously, it doesn't change our cash flow before changes.

Brian: Where it shows up on the income statement so.

Brian: So I think it's important to note that we are expecting to to drive margin expansion even.

Brian: As we.

Brian: You have a movement away from capitalized software development to more R&D expense.

Speaker Change: Great. Thank you.

Thank you. Our next question comes from the line of <unk> <unk>.

Lynn Moore: 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 the approach that we took generally with Tyler going back four or five years, which is going forward. You know, we really want to be leading to the cloud. We think the market's 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 are more cloud native already. Those have been a little bit smaller competitors, and they have had their own set of issues to deal with.

Speaker Change: <unk> Securities. Please go ahead.

Speaker Change: Hi, good morning looking.

Speaker Change: 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.

Speaker Change: Yes, I do.

Speaker Change: I think there is anything unusual what we did point out.

Speaker Change: I think.

Speaker Change: We in the street are still getting used to the seasonality of the transaction business.

Speaker Change: And I see.

Speaker Change: When they were separate public company.

Speaker Change: Certainly.

We're well versed in that and people, who followed them more.

Speaker Change: But as that impacts Tyler and as we thought this quarter.

Speaker Change: Seasonality around the transactions is pretty significant I don't expect that to be meaningfully different.

Lynn Moore: 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 in public safety. If you've been on our website, you might have seen a new division president that came on last year, came from outside of Tyler. He's actually led, been a part of leading companies through a cloud transition, so it's exciting to have him there, have him up in Troy with the people, and really sort of helping to lead those efforts.

Speaker Change: In 2024, but I think thats the biggest thing to look out for.

When you when you look at the quarters.

Speaker Change: Great and then just.

Speaker Change: It's more of a macro question for you given the impasse in Congress related to the spending Bill are you seeing any changes to the sales cycle, especially in the federal the federal business.

Charles: Charles Yes.

Charles: Not really not right now.

Charles: Q1 is probably talking about Jewish talked about seasonality Q1 is probably a little bit slower time.

Brian Miller: So I like where we are, I like where we sit, and to reiterate your words, it's gratifying to see these early results, but there are a lot of things I'm going to caution you on, a lot of things to go execute on in the future, but it is good to see this shift starting to happen in public. Okay, I appreciate that. Thank you. And then, um, 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? Thanks.

Charles: Time in that business as well.

And right now there.

Charles: No no real change in our outlook.

Speaker Change: Great. Thank you.

Speaker Change: Yes.

Speaker Change: Thank you. Our next question comes from Jonathan Ho William.

Jonathan Ho: William Blair. Please go ahead.

Jonathan Ho: Good morning, just one 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 four additional operating leverage.

Brian Miller: Yeah, I mean, I think there continues to be a lot of development around the cloud and new. 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 the expense as opposed to being capitalized. That obviously doesn't change our cash flow, but it changes where it shows 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 to more R&D. Thank you. Thank you. Our next question comes from the line of Charles Strauzer of CJF Security Inc. Please go ahead. Good morning. 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 model? I don't. I don't think there's anything unusual.

Speaker Change: Some of the moving parts there as we as we think about your guidance for 2024.

Speaker Change: I'd say most of the leverage that we're seeing in the model is coming from cloud operations that the things we've talked about the impact of.

Of.

Speaker Change: Our.

Speaker Change: Moving customers out of our data centers in India and are planning to have that first data center closed mid year.

Speaker Change: The benefits, we're getting from both scale and improved costs at AWS as we.

Speaker Change: Put our new customers, there and move existing.

Speaker Change: <unk> customers in the AWS of those unit costs become lower.

Speaker Change: And I think the.

Speaker Change: The new agreement with AWS further.

Speaker Change: To help that.

Speaker Change: Pricing in.

Speaker Change: Leverage that we get as we scale that business.

Speaker Change: The version consolidation expenses or benefits that Lynn mentioned as we eliminate.

Speaker Change: Multiple versions of software and create efficiencies around both support and development. So those cloud operations are really the biggest things driving.

Charles S. Strauzer: What we did point out, you know, I think we in the street are still getting used to the seasonality of the transaction business. When they were separate public companies, certainly. We're well-versed in that, and people who followed them were, 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 quarter. Great

Speaker Change: Our.

Speaker Change: Margin leverage and those are the things we pointed to at Investor day that we will continue to drive that margin expansion that we expect to see over the next.

Speaker Change: Several years since we started.

Speaker Change: 2030 targets, yes, John I would just add to that.

Speaker Change: I mean, we're always looking at leavers.

Speaker Change: To help make us more efficient there is theres a number of internal initiatives going on.

Speaker Change: We look around in and look up and see opportunities for where we can operate internally more efficiently in and Theres a number of those things that are.

Brian Miller: And then just more of a macro question for you, given the impacts in Congress related to the spending bill, are you seeing any changes to the sales cycle, especially in your federal government? Charles, yeah, not really, not right now. You know, Q1 is probably the most important we talked about, we talked 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. Great, thank you.

Speaker Change: We're actively.

Speaker Change: Actively acting on which is the federal it sounds we are progressing on it so.

Speaker Change: It makes sense that makes sense.

Speaker Change: Regards to use of capital now that your debt payments.

Speaker Change: Sort of the interest payments under one times EBITDA, how should we think about your plans for capital deployment going forward. Thank you.

Speaker Change: Yeah sure Jonathan I think it's I think right now we're still sort of in the same place we've been for the last couple of years.

Jonathan Frank Ho: Thank you. Our next question comes from Jonathan Ho of William Blair. Please go ahead. Good morning.

Speaker Change: Even though we will likely play out pay off the term debt.

Jonathan Frank 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? I'd say most of the leverage that we're seeing in the model is coming from cloud operations. It's the things we've talked about the impact of moving customers out of our data centers and into AWS and our plan to have that first data center closed mid-year. 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 are lower.

Speaker Change: Early this spring sometime this spring.

Speaker Change: 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 in where it's accretive to Tyler.

Speaker Change: Last year, we did four deals I think we spent about 70 $576 million in cash and stock.

Speaker Change: Over the last few years, we spent several hundred million dollars of deals even as we were prioritizing debt paydown. So we.

Speaker Change: We still want to prioritize being in a good position when the convertible as do but at the same time, we'll we'll make smart acquisitions along the way.

Brian Miller: And I think the new agreement with AWS further helps that. Pricing and and, Unknown Speaker, unknown Spokesperson, Unknown Speaker, Unknown Speaker, Unknown Speaker, Yeah, and John, I would just add to the, you know, We're always looking at levers to help make us more efficient. There are 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. There's a number of those things that we're actively acting on, which really sounds weird.

Speaker Change: Thank you.

Speaker Change: Thank you. Our next question comes from London.

John S. Marr: <unk> of Evercore ISI. Please go ahead.

Speaker Change: Yes, thanks very much.

Speaker Change: Lynn can you remind us just when you 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 and opportunity for cross sell up sell for you, meaning yes.

Speaker Change: Munis are ERP deals SaaS deals come up is that an opportunity for the salespeople start talking about additional products or solutions, meaning we.

Lynn Moore: We're progressing on, makes sense. That makes sense. Um, just with regard to the use of capital, now that your debt payments have put sort of the interest payments under one times, you know, how should we think about your plans for capital deployment going forward? Thank you. Yeah, sure, Jonathan.

Speaker Change: Should it 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 across our up sell basis.

Well it certainly is another conversation point with the client so that anytime there's a conversation point there is opportunities for cross sell upsell, but we've got installs.

Speaker Change: ALS teams across all of our organizations and.

They are reaching out to clients, whether they're halfway through their SaaS contract or at the beginning of the SaaS contracts are towards the end of it. So I don't know that thats, a specific trigger for signify material uplift.

Brian Miller: I think right now we're still sort of in the same place we've been for the last couple of years. Even though we will likely pay off the term debt sometime early this spring, sometime this spring, we still have that $600 million convert that's due in a little more than two years. So my anticipation is that 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're going to continue to do M&A, particularly where it makes sense strategically and where it's accretive to Tyler. You know, last year we did four deals. I think we spent about $75, $76 million in cash on stock.

Speaker Change: But it is just another it's another data point that's a.

Speaker Change: Contact point with our clients.

Speaker Change: That's helpful.

Speaker Change: Slips provide that same opportunity so as we're having conversations with clients about moving a product to the cloud.

Speaker Change: Gives us an opportunity to have that conversation around other products, maybe in that same suite that they might have on premises.

From another.

Speaker Change: Provided that arent Tyler products and the opportunity to.

Speaker Change: To bring together an integrated set of solutions.

Speaker Change: While they are moving to the cloud.

Speaker Change: And I think that as we continue to accelerate the pace of those.

Speaker Change: They will continue to look for those opportunities.

Brian Miller: Over the last few years, we've spent several hundred million dollars in 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. Thank you. Thank you. Our next question comes from the line of Kirk Materne of Evercore SI. Please go ahead.

Speaker Change: Two.

Speaker Change: For greater Upsells and cross sells.

Speaker Change: Okay, and I guess, thank you for that and then I guess, Brian speaking of slips, obviously, youre guiding maintenance revenue to come down a little bit which makes tons of sense as you've flipped people from on Prem to cloud can you just remind us the benefits the uplift.

Speaker Change: That change.

Brian: Plays out over a couple of years, meaning.

Kirk Materne: Yeah, thanks very much. Lynn, can you remind us just when, say, contracts that you signed on a SaaS basis, you know, four or five years ago start to come up for renewal, you know, how much of that is the renewal function, you know, an opportunity for cross upsell for you, meaning, you know, as, you know, your Munis or ERP deals or SaaS deals come up, you know, is that an opportunity for the salespeople to start talking about additional products or solutions, meaning, you know, we should start to get into a little bit of a renewal cycle over the next couple years, just wondering how that works in terms of the uplift either on a cross or upsell basis. Well, it certainly is another conversation point with the client. So anytime there's a conversation point, there's opportunities for cross-sell, up-sell.

Brian: Just use the Idaho example, the reason youre not seeing sort of the SaaS revenue get all the benefit of that slip is youre, just not going to see it on the income statement until 'twenty. Five so is that the way you should think about sort of that $1 seven uplift that that plays out over 24 months.

Brian: Yes, there is always a lag and sometimes we might sign a flip and it starts next quarter.

Brian: And and then we see that uplift than.

Brian: Other times, whether it's because of things.

Brian: <unk> 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.

Brian: Internal priorities around their own resources that caused the delay.

Brian: Or.

Yes.

Brian: There are a variety of reasons why there can be a lag from one to multiple quarters and sometimes it doesn't all happen at once so they may be.

Lynn Moore: But, you know, we've got installation sales teams across all of our organizations, and they're reaching out to clients, you know, whether they're halfway through their SAS contract or at the beginning of the SAS contract or towards the end of it. So I don't know that that's a specific trigger for Signify material uplift, but it is just another data point that's a contact point with our clients. Unknown Speaker.

Brian: Ripping mulch.

Brian: Multiple applications with us.

Brian: They.

Brian: Start the uplift starts at different times.

Brian: So.

Brian: Yes.

Brian: I would say generally it's not 24 months, but.

Brian: But it could be from one to two a few quarters.

Brian Miller: Flips provide that same opportunity, so as 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, they will continue to 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-premises to cloud. Can you just remind us the benefits of the uplift from that change? You know, that plays out over a couple years, meaning you just use the Idaho example.

Brian: Where we see the full impact of those from the time, we sign it to when we see the impact on.

Brian: The uplift.

Speaker Change: Okay Super helpful. Thank you all.

Speaker Change: Thank you. Our next question comes from the line of Alex <unk> of Wolfe Research. Please go ahead.

Alex: Hey, guys. Thanks for taking the question.

Alex: Maybe just the first one I think last quarter you talked about.

Alex: I wanted to do about 100, plus flips in Q4 is the right way to think about it that the dollar value of the flips was.

Alex: In line with with your expectations, but maybe not the actual number and then to the point earlier.

Alex: Do you did some of those get pushed into 'twenty four and now there is the opportunity for.

Alex: For higher dollar value in 2004, just help us understand a little bit about that dynamic.

Alex: Yes.

Alex: Well I'd just say when we talk about the number of flips its just not that precise I mean.

Alex: The timing for example, the Idaho.

Alex: Signing the Idaho agreed.

Alex: Agreement I think it was almost three years in the making that we had discussions with them and planning.

Brian Miller: The reason you're not seeing sort of the fast 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? Yeah, there's always a lag.

Alex: When I was talking about it's very complex to move statewide court system.

Alex: A lot of planning on their part a lot of planning on our part on how that all goes and getting comfortable with that.

Alex: What quarter that actually get signed in.

Alex: Now not all of them are that complex, but.

Brian Miller: And sometimes we might sign a flip, and it starts the next quarter. And then we see that uplift. Other times, whether it's because of things that the client needs to do 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 cause a delay, or, you know, 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.

Alex: But there's not that much precision around directionally, whether it's 90 to 100 or 103.

Alex: So I would say that the number was generally in line and the pace at which they are moving is in line with our expectations. The dollar value probably was a bit ahead of what we expected. So there was a little bit more larger ones in there and the uplifts were a little better than we expected but.

Alex: But.

Alex: It's really hard to be very precise from quarter to quarter about what we expect that but.

Alex: We are saying that we are on track with our long term expectation that we.

Brian Miller: So they may be flipping multiple applications with us so that they, you know, they're not starting the uplift at different times, so you know, I think generally it's not 24 months, but it could be from one to two a few quarters before we see the full impact of those from the time we sign it to when we see the impact. That's super helpful. Thank you all. Thank you. Our next question comes from the line of Aleksandr Zukin of Wolf Research. Please go ahead. Hey guys, thanks for taking the question. Maybe just the first one.

Alex: <unk>.

Alex: Of.

Alex: The number of clients in the dollar volume that will migrate over the next.

Alex: Several years as we drive towards that.

Alex: 75% to 85% of our customer base migrated to the cloud by 2030.

Alex: But.

Alex: Just like with new business signings exact quarter involved in is a bit hard to predict.

Alex: But that's where at least in line with our expectations around flips.

Speaker Change: Got it helpful and then maybe just as.

Speaker Change: As a follow up.

Speaker Change: There is currently legislation out there that could reverse some of the R&D tax payments that you have to make.

Aleksandr J. Zukin: 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, you know, 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?

Speaker Change: What would be the impact of that.

Speaker Change: If that act passed on you guys like what how much and when would you see those dollars return.

Speaker Change: Yes.

Speaker Change: It's a little hard to tell exactly.

Speaker Change: I think that the bill that's out there now that I believe has passed the house.

Brian Miller: And now, you know, there's the opportunity for a higher dollar value in 24. Just help us understand a little bit about that dynamic. Yeah, well, I just say when we talk about the number of flips, it's just not that precise. I mean, the timing, for example, the Idaho agreement, I think it was almost three years in the making when we had discussions with them and planning. As Lynn was talking about, it's very complex to move a statewide court system.

Speaker Change: Would actually not rescind it would delay it until 2026.

So the incremental taxes that we pay.

Speaker Change: We would.

Speaker Change: If that became effective we would not have.

Speaker Change: And the incremental taxes that $50 million that we've talked about for this year and lesser numbers going forward.

Speaker Change: It's a little unclear exactly how and when we would sort of get back the taxes, we paid in the incremental taxes, we paid in 2023, which were $127 million.

Brian Miller: A lot of planning on their part, a lot of planning on our part of how that all goes and getting comfortable with that. So what quarter does that actually get signed in? Now, not all of them are that complex.

Speaker Change: Presumably that would either offset.

Speaker Change: The.

Speaker Change: Offset our normal tax payments, so reduce those tax payments over the next year.

Speaker Change: Year or two or.

Speaker Change: File for a refund.

Speaker Change: Also take some time so.

Speaker Change: 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.

Brian Miller: But, you know, 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 was probably a bit ahead of what we expected, so there were 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.

Speaker Change: Recover the incremental taxes, we paid in either through <unk>.

Speaker Change: Refunds or or lower.

Speaker Change: Estimated payments going forward.

Speaker Change: Got it thank you guys.

Speaker Change: Thank you and our next question comes from Manav <unk>.

Manav: Research. Please go ahead.

Manav: Yes.

Manav: Good morning, guys in terms of the backlog, obviously, a nice jump this quarter year over year.

Manav: How are we thinking about the duration of that backlog is holding relatively stable or is that getting longer.

Manav: It's generally stable.

Manav: The.

<unk>.

Manav: The part that is expected to be recognized in the next 12 months I think is reasonably stable with where it's been.

Brian Miller: We are saying that we are on track with our long-term expectation that the number of clients and the dollar volume will migrate over the next several years as we drive towards that. I know that 75-85% of our customer base will migrate to the cloud by 2030. I found it helpful 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 have to make. What would the impact be if that act was passed on you guys? How much and when would you see those dollars returned?

Manav: The term of new SaaS deals for example, this quarter I think was very similar it was a little under four years average term.

Manav: So fairly consistent with what we've seen in recent quarters. So.

Manav: And then of course, the transaction contracts don't really.

Go into backlog.

Manav: So.

Manav: So they don't really affect that number, but but on the software side I'd say.

Manav: There arent any meaningful changes in that.

Manav: Duration of backlog.

Speaker Change: Alright Thats helpful.

Speaker Change: A follow up.

Speaker Change: Obviously been a lot of high profile cyber security issues.

Aleksandr J. Zukin: Yeah, it's, it's a little hard to tell exactly. But I think that the bill that's out there now, which I believe has passed the House, would actually not rescind it but 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 the incremental taxes we paid in in 2023, which were $127 million. Presumably, those would either offset the $50 million that we paid in in 2023, which was $127 million.

Speaker Change: For the past year with public agencies.

Speaker Change: The issue has been with <unk>.

Speaker Change: Agencies are then primarily.

Speaker Change: <unk> versus the cloud and it's been on Prem or are you seeing that is perhaps one of the impetus is for the acceleration of the slips.

Speaker Change: Yes, absolutely.

Speaker Change: Youre spot on on both.

Speaker Change: So some of these issues have come with some obviously some existing clients of ours and it is an opportunity.

Speaker Change: It is more stable more secure we actually have done some deals.

Speaker Change: Where clients who might have been resistant to the cloud.

Speaker Change: Flip because of some sort of recent ransomware or other issue.

Speaker Change: Great. Thank you.

Okay. Thank you I'll now pass some scheduled start time, please limit your questions to one purposes.

Speaker Change: Our next question comes from the line of let's say <unk> of J P. Morgan. Please go ahead.

Speaker Change: Good morning, Lynn I recall comments from last year.

Aleksandr J. Zukin: So reduce those tax payments over the next year or two, or we would file for a refund, which also takes some time. It's hard to exactly quantify how that would be, but clearly, we wouldn't have those incremental payments going forward. In some manner, we would look to recover the incremental taxes we paid in, either through, Unknown Speaker, Unknown Attendee, Unknown Speaker, Unknown Speaker, Unknown Speaker, Got it.

Speaker Change: Roughly 20% of your customers have migrated to the cloud can you provide an update.

Lynn Moore: That mix as you move towards that target of 75% by 2030.

Lynn Moore: Yes, I think.

Speaker Change: At Investor Day, we said, we were somewhere around 15%.

Speaker Change: And.

Speaker Change: So.

Speaker Change: Obviously, you've made progress since then I'd say, we're probably.

Keith Michael Housum: Thank you, guys. Thank you. Our next question comes from the line of Keith Housum of North Coast Research. Please go ahead. Good morning, guys.

Speaker Change: More around that 20% number now in terms of the.

Speaker Change: We've moved.

Speaker Change: But.

Brian Miller: In terms of the backlog, obviously, 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 it getting longer?

Speaker Change: As I said earlier, we are.

Speaker Change: Each of our products has a timeline and a roadmap for how they get to that point that converges on our entire customer base being <unk>.

Speaker Change: 75% to 85% of the existing on Prem customers converted by 2030, so each each product is starting from a different place with their customer base, we've talked about public safety.

Brian Miller: is 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 SAP deals, for example, this quarter, I think was very similar. It was a little under four years on average term.

Speaker Change: Just getting its first flips this past year.

Speaker Change: Other products are much further along so everybody has their own roadmap that <unk>.

Speaker Change: <unk> on that that overall number by 2030.

Lynn Moore: [inaudible] There aren't any meaningful changes in that duration of back pain. That's helpful. Just as a follow-up, there's obviously been a lot of high-profile cybersecurity issues over the past year with public agencies. But 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 one of the impetuses for, you know, the acceleration of the flip? Yeah, absolutely. You're spot on on both.

Speaker Change: And.

Speaker Change: And none of those will happen exactly as planned but.

Speaker Change: We have said that we are collectively on track.

Speaker Change: Achieve those targets by 2030.

Speaker Change #100: Thank you.

Speaker Change #101: Thank you. Your next question comes from the line of Jefferies Piper Sandler. Please go ahead.

Speaker Change #102: Hello. Thank you for taking the question Lynn I wanted to go back to something you said about the California contract and the fact that it will be a drag on margins, but margin expansion over multiple years.

Lynn Moore: And so some of these issues have come with some, obviously, some existing clients of ours, and, and this is an opportunity: the cloud is more stable, more secure. We actually have done some deals where clients who may have been resistant to the cloud have flipped because of some sort of recent ransomware or other issues. Great, thank you. Thank you. As we are now past our scheduled start time, please limit your questions to one person. Our next question comes from the line of Alexei Gogolev of J.P. Morgan. Please go ahead.

I'm 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.

Lynn Moore: That just reflective of services implementation costs in the first year that go away.

Lynn Moore: And.

Yes, let me, let me clarify that.

Lynn Moore: It was a drag on margin in 2024.

Lynn Moore: It will it will probably equate roughly two.

Alexei Mihaylovich Gogolev: Good morning, Lynn. I recall comments from last year that roughly 20% of your customers have migrated to the cloud. Can you provide an update on that mix as you move towards that target of 75% by 2030? Yeah, I think at Investor Day, we said we were somewhere around 15%. And so we've made progress since then. I'd say we're probably, you know, more around the 20% number now in terms of the amount that we've moved.

Lynn Moore: Maybe a little bit of margin drag in 'twenty five, but it's just the ramp up of revenues versus expenses. So the expenses are more frontloaded.

Lynn Moore: Get them up and running.

Lynn Moore: As Brian mentioned.

Lynn Moore: Going from a contract that was a little under $3 million a year in revenues I think first year, we're expecting it to.

Lynn Moore: Just slightly more than double that but when 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 Opie, starting next year and ramping up significantly each year over over time.

Lynn Moore: But as I said earlier, each of our products has a timeline and a roadmap 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. Each product is starting from a different place with their customer base. We've talked about public safety, which is just getting its first flips this past year. Other products are much further along.

Speaker Change #103: Thank you.

Thank you. Your final question comes from the line of David <unk> with Wells Fargo. Please go ahead.

David: Thanks, very much guys so back to the Philips again.

Speaker Change #105: Topic has joined the call.

David: I would ask is how should we think about licensed <unk> as a percentage of total <unk> on a normalized quarterly run rate path to both the midterm and long term target.

Brian Miller: So everybody has their own roadmap that converges 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. Thank you. Thank you. Our next question comes from the line of Clarke Jeffries of Piper Sandler. Please go ahead.

David: Yes.

David: Okay.

David: <unk>.

Speaker Change #106: Yes, we would expect license <unk>.

Speaker Change #106: Revenues to our license well license revenues.

Speaker Change #106: Are mostly recognized upfront so.

Two.

Speaker Change #106: We actually expect.

Speaker Change #106: Low single digit growth this year, but.

Clarke Jeffries: Hello, thank you for taking the question. Lynn, I wanted to go back to something you said about the California contract and the fact that it 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?

Speaker Change #106: In terms of the mix for them to continue to decline as part of our overall mix.

Speaker Change #107: I don't have that sort of broken out year by year or quarter by quarter.

Speaker Change #107: But we would expect that that percentage of new business. That's now in the high Eighty's to continue too.

Speaker Change #107: Expand incrementally year by year until.

Lynn Moore: Is that just reflective of services implementation costs in the first year that go away? And go ahead. Yeah, 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.

Speaker Change #107: Theres very little license revenue left we do have some third party licenses, we have some license sales back into existing on prem customers, but.

Speaker Change #107: Really selling very little only a couple of products, where we really sell any licenses at all.

Lynn Moore: 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 for the first year, we're expecting it to be just slightly more than double that. But you know, looking out in 2025, it goes to 20 million, and we expect it to grow all the way up to close to 30 million.

Speaker Change #107: And the new business market.

Speaker Change #107: And part of your question was around total contract value <unk>.

Speaker Change #107: Yes, so that'll that'll obviously.

Speaker Change #107: Very little bit depending on the SaaS term that we sign.

Speaker Change #107: 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.

Speaker Change #107: If the SaaS the SaaS contract was probably only one or two years, it's probably going to have a lower <unk>. If it's north of three years. So you get to four years five years, we would have a probably initial higher TCE.

Lynn Moore: By the end of the contract, we do expect positive OP starting next year and ramping up significantly each year over time. Thank you. Thank you. Our final question comes from the line of David Unger of Wells Fargo. Please go ahead.

Thanks for the details gentlemen.

Speaker Change #108: Thank you.

Speaker Change #109: We are participating no further questions at this time, Mr. Lynn Moore, President and CEO of condensate Moody's I'll turn the call back entity.

David B. Unger: Thanks very much, guys. So back to the flips again, and the topic is you on the call. Another question I would ask is how should we think about licensed TCV as a percentage of total TCV on a normalized quarterly run rate path to both the midterm and long term targets?

Speaker Change #110: Thanks, <unk> 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.

Speaker Change #111: Thank you. This does conclude today's conference call. We thank you for participating you may now disconnect.

Brian Miller: Thank you. I'm Yeah, we would expect a license. Revenues from our license, well, licensed revenues, which are mostly recognized up front. 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. We don't have that sort of broken out year-by-year or quarter-by-quarter, but we would expect 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.

Speaker Change #112: Please wait the conference will begin shortly.

Speaker Change #112: [music].

Speaker Change #112: Okay.

Speaker Change #112: [music].

Speaker Change #112: Yes.

Speaker Change #112: Yes.

Brian Miller: We do have some third-party licenses. We have some license sales back into... [inaudible] I think part of your question was around total contract value, TCV, and yeah, so that'll obviously vary a little bit depending on the SAS term that we sign. You know, you could use a rule of thumb of what a license deal and a one-year maintenance might drag on that versus sort of what we would project as a normal SAS deal. So, you know, if the SAS contract was probably only one or two years, it's probably going to have a lower TCV.

Speaker Change #112: Okay.

Speaker Change #112: Okay.

Speaker Change #112: Yes.

Speaker Change #112: Sure.

Yes.

Speaker Change #112: [music].

Speaker Change #112: Sure.

Speaker Change #112: Okay.

Speaker Change #112: Yes.

[music].

Speaker Change #112: Okay.

Speaker Change #112: Sure.

Speaker Change #112: [music].

David B. Unger: Thanks for the detail, gentlemen. Thank you. There 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. Thanks, Vivesh, 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! Thank you. This does conclude today's conference call. We thank you for participating. You may now disconnect. Please wait; the conference will begin shortly. Please wait; the conference will begin shortly.

Speaker Change #112: Yes.

Speaker Change #112: Okay.

Speaker Change #112: Okay.

Speaker Change #112: Okay.

Speaker Change #112: [music].

Speaker Change #112: Thanks.

Speaker Change #112: Okay.

Speaker Change #112: [music].