Summary
- Tyler Technologies continues to be a market leader with multiple acquisition catalysts, which positions it well to capitalize on opportunities arising from the favorable global government IT spending.
- It has also been successful in securing new contracts and maintains an outstanding gross retention rate.
- The management has expressed a positive outlook regarding their margin improvement, which is attributed to the removal of related costs associated with their two proprietary data centers.
- TYL remains fundamentally liquid and relatively inexpensive compared to its historical performance, making it an attractive buy candidate.
In today's rising inflationary environment, a slowing margin performance is one of the key factors contributing to today's correction. In fact, since its 2021 high, Tyler Technologies, Inc.'s ( TYL ) stock price has fallen by more than 40%. As TYL transitions to its cloud-first approach, its margins have been in a declining trend. However, the management is confident that transitioning to cloud-first approach will improve the company's long-term prospects. Despite the fact that this transition will decrease TYL's licensed-related revenue, it will nevertheless enable the company to reduce costs associated with its data centers. In fact, the management anticipates that this transition will pivot in 2023 and begin to show some signs of margin improvement as they leave their proprietary data centers in 2024 and 2025. Considering the positive government IT spending outlook and a potential improvement on its operating margin, TYL is a good buy on fear candidate as of this writing.
Company Background
In order to help customers streamline their processes and boost productivity, Tyler provides a complete range of IT services, including infrastructure and software maintenance. The majority of its clients are public sector groups like government entities and schools. TYL's financial results are broken down into two reportable segments: Enterprise Software ("ES") and Platform Technologies ("PT"), and both segments recognized positive (YoY) growth in FY'22 of 10% and 32%, respectively. Its ES segment continued to be the company's main top line contributor, ending FY'22 amounting to $1,278.8 million. This segment provides software systems and services made to satisfy customers' automation and information technology needs.
In fact, TYL enjoys new contract wins as quoted below.
In other Tyler divisions, we signed seven additional significant SaaS deals, each for different product suites and each with a total contract value greater than $2 million. Those include contracts with the Cypress Fairbanks Independent School District in Texas for our student transportation solution; the cities of Prosper Texas and Glendora, California for our enterprise ERP and enterprise permitting and licensing solutions; the Placer County Water Agency in California, and the City of Helena, Montana for our enterprise ERP solution; the City of Albuquerque, New Mexico for enterprise permitting licensing solution; and Lucas County, Ohio for our enterprise justice solution. In addition to those deals, we signed 12 SaaS deals in the quarter, with contract values between $1 million and $2 million each.
In the fourth quarter, we signed 153 new payments deals worth more than $4.7 million in estimated annual recurring revenue across Tyler divisions, other than digital solutions. The largest of those was an agreement to provide payment processing for the City of Milwaukee, Wisconsin, was estimated annual revenues of more than $1.2 million. Source: Q4'22 Earnings Call Transcript
Additionally, TYL continues to improve this segment through acquisitions, like that of Quatred , which it acquired this FY'22. This acquisition aims to provide TYL with opportunities to expand its offerings in the public sector, specifically enhance its barcoding solution for ERP clients. According to the management, this acquisition will position them to capitalize opportunities in public safety and public administration. Total ES subscription revenue went up 24% to $526.3 million from a year ago. This growth indicates that TYL's strategy of investing in cloud-based solutions and making acquisitions to extend its ES segment brings more value to the company.
Another interesting catalyst is the outstanding growth in TYL's PT segment. The company is investing to enhance their digital government and payments solutions. In fact, this FY'22, they closed acquisitions of two companies, Rapid Financial Solutions and US eDirect .
TYL's Growing Digital Solutions (Source: Earnings Call Presentation)
TYL appears to be in a strong position now and will continue to drive growth in the years to come based on its recent successes in securing new contracts, growing its footprint, and boasting state renewals, as shown in the image above.
There is no wonder why TYL recognized a growing annualized recurring revenue ("ARR") as quoted below.
Our non-GAAP ARR was approximately $150 billion - I'm sorry, $1.50 billion, up 7.5%. Non-GAAP ARR for SaaS software arrangements was $440.6 million, up 18.5%. Transaction-based ARR was $586.2 million, up to 6.9% and non-GAAP maintenance ARR was slightly down at $469.1 million due to the continued shift of new clients and migration of on-premises clients to the cloud. Source: Q4'22 Earnings Call Transcript
TYL's Leading Solutions (Source: Earnings Call Presentation)
Overall, being included in Government Technology's GovTech 100 list and listed in Forbes' "Most Innovative Growth Companies" list is a testament to TYL's success in enhancing its competitive position in the market. In fact, as shown in the image above, it remains a market leader in the industry. In addition, its 98% customer retention rate is an indication of its ability to provide high-quality software solutions and maintain strong relationships with its customers. This makes Tyler Technologies attractive, especially considering its potential improvement on its margin.
…we believe sort of the trough of our operating margin is in 2023. After that, we'll see relief from some of the bubble costs. We also expect to see a pretty significant decline in license revenues because of the shift in the mix in 2023 that will impact margins. But we believe after '23, we're out of -- sort of around that inflection point, and then we'll start to be on a trajectory of margin improvement after that. Source: Q4'22 Earnings Call Transcript
Consolidating Near Its Support
TYL: Weekly Chart (Source: Author's TradingView Account)
Looking at the chart above, we can see that TYL is currently trading below both its 50- and 200-day simple moving averages, possibly contributing to the current bearish trend. This might push the price of TYL all the way to its key support area near the 52-week low. However, considering its multi-week consolidation above its $300 support area and a potential break above the 50-day simple moving average could shift today's bearish structure to a bullish one, which could attract bulls in the next trading weeks. Investigating its MACD, it appears to be showing bullish momentum as indicated by its bullish crossover from its signal line as shown in the chart above, supporting the idea of a potential exhaustion of the bearish momentum we are seeing today.
Valuation
TYL trades at a trailing (Non-GAAP) P/E of 43.29x, and this high multiple seems unattractive in today's bearish environment. However, considering its 5-year average of 58.70x, as of this writing, TYL trades at a decent discount. This is especially true considering its forward P/E of 42.75x, which is way cheaper than its 5-year average. Additionally, TYL trades at a cheaper forward EV/EBITDA of 30.12x than its 5-year average of 56.83x, making this stock worth monitoring at today's level. In my opinion, TYL is currently undervalued given its favorable demand environment and the potential for future margin expansion.
Final Key Takeaway
A high P/E multiple for TYL reflects its solid fundamentals, which include high customer satisfaction, a broad variety of products, and a diverse customer base. Its recent acquisitions have also expanded its product offerings and customer base, setting the company up for sustained long-term growth.
Keep in mind that TYL's stock may be volatile in the short term due to its declining gross margin and fear of a looming recession; if this occurs, TYL will be more attractive than it is today.
TYL has deleveraged its balance sheet, as shown by its declining total debt of $1,046.2 million compared to last year's $11,388.2 million. This snowballed to a more attractive debt-to-equity ratio of 0.40x, better than 0.60x last year. Additionally, TYL shows a growing free cash flow amounting to $358.93 million, up from the $337.83 million recorded in FY'21. This improvement in its liquidity makes the company even more attractive. TYL is a good buy on the fear candidate.
Thank you for reading and good luck!
For further details see:
Tyler Technologies: Attractive On Its Margin Pivot Catalyst