Business Overview

Tyler Technologies, Inc. is a leading provider of integrated software and technology services for the public sector. The company's comprehensive suite of solutions empowers local, state, and federal government entities to operate efficiently and transparently, delivering enhanced services to their communities. With a relentless focus on innovation and a cloud-first strategy, Tyler has established itself as a trusted partner in the digital transformation of the public sector.

Tyler Technologies' two reportable segments, Enterprise Software (ES) and Platform Technologies (PT), cater to the diverse needs of public sector organizations. The ES segment provides software systems and services for mission-critical "back-office" functions, such as public administration, courts and public safety, education, and property and recording solutions. The PT segment, on the other hand, offers platform and transformative solutions, including digital services, payment processing, and workflow optimization.

Tyler's success is underpinned by its deep domain expertise, strong client relationships, and a commitment to delivering cutting-edge technology. The company's large installed base, which includes over 13,000 locations across all 50 U.S. states, Canada, the Caribbean, Australia, and other international markets, serves as a significant competitive advantage, enabling cross-selling and upselling opportunities.

Financials

In the fiscal year 2023, Tyler Technologies reported annual revenue of $1.95 billion, a 9.2% increase from the previous year. The company's net income for the year stood at $165.9 million, while its annual operating cash flow and free cash flow were $380.4 million and $327.4 million, respectively.

During the first quarter of 2023, Tyler Technologies continued its strong performance, reporting total revenues of $512.4 million, up 9% compared to the same period in the prior year. Subscriptions revenue, which includes SaaS and transaction-based fees, grew 12% to $313.2 million, while maintenance revenue increased 2% to $117.2 million. Professional services revenue also saw a 6% rise to $64.8 million.

Recurring Revenues and Cloud Transition

A key focus for Tyler Technologies has been its transition to a cloud-first business model. The company's subscription-based revenues, which include SaaS and transaction-based fees, now account for 61.2% of total revenues, up from 59.4% in the same period last year. SaaS revenues grew 23.2% year-over-year, marking the 14th consecutive quarter of SaaS revenue growth exceeding 20%.

The company's cloud migration efforts have been a significant driver of its financial performance. Tyler has made substantial progress in consolidating its product versions and moving clients to the cloud, with 97% of new software contract value in the second quarter of 2023 being SaaS-based, compared to 82% in the prior-year period. This shift has enabled the company to realize operational efficiencies and margin improvements, with its non-GAAP operating margin expanding by 150 basis points year-over-year to 24.5% in the second quarter.

Segment Performance

The Enterprise Software (ES) segment, which accounts for the majority of Tyler's revenues, reported a 12.4% increase in subscriptions revenue and a 1% increase in maintenance revenue during the first quarter of 2023. The segment's professional services revenue grew 7%, while software licenses and royalties revenue declined 6%.

The Platform Technologies (PT) segment, which includes the company's digital government services and payment processing offerings, saw a 1% increase in subscriptions revenue and a 20% rise in maintenance revenue. Professional services revenue for the PT segment grew 5%, while software licenses and royalties revenue declined 92%.

Geographic Breakdown

Tyler Technologies primarily serves the domestic public sector market, with a strong presence across the United States. The company's international operations, which include clients in Canada, the Caribbean, Australia, and other regions, account for a small but growing portion of its overall business.

Guidance and Outlook

For the full year 2023, Tyler Technologies expects total revenues to be between $2.12 billion and $2.15 billion, representing organic growth of approximately 9% at the midpoint. The company anticipates GAAP diluted earnings per share (EPS) to be between $5.76 and $5.96, and non-GAAP diluted EPS to be in the range of $9.25 to $9.45. Additionally, the company expects its free cash flow margin to be between 18% and 20%, including an estimated impact of approximately $60 million in incremental cash taxes related to Section 174.

Growth Drivers and Strategic Initiatives

Tyler Technologies' growth strategy is centered around four key drivers: leveraging its large installed base, expanding into new markets, completing its cloud transition, and growing its payments business.

The company's sizable client base represents a significant asset, enabling cross-selling and upsell opportunities. Tyler has been successful in securing large, strategic wins that combine multiple solutions, such as the $1.9 million ARR contract with Fulton County, Georgia, which includes integrated justice solutions and additional client management services.

Expanding into new markets, both geographically and across different public sector verticals, is another crucial element of Tyler's growth strategy. The company's recent acquisitions, such as ResourceX, ARInspect, and CSI, have strengthened its capabilities in areas like budgeting software, AI-powered field operations, and court solutions, positioning it for further market penetration.

Tyler's cloud-first strategy has been a key driver of its financial performance, as the company continues to migrate its clients to the cloud. The successful SaaS migration of the Idaho State Court system, the company's first statewide court system to move to the cloud, has served as a positive reference point for engaging with other large core clients.

The company's payments business has also been a source of growth, with transaction revenues growing 3.8% in the second quarter of 2023. Tyler has been successful in signing new payments deals, representing approximately $8 million in projected ARR, and securing extensions for its digital government and payment processing services under several state enterprise contracts.

Risks and Challenges

While Tyler Technologies has demonstrated strong financial and operational performance, the company faces several risks and challenges that investors should consider.

The public sector's budgetary constraints and potential changes in government spending priorities could impact the company's growth trajectory. Additionally, the highly competitive nature of the public sector software market, with both established players and emerging cloud-native competitors, may put pressure on Tyler's market share and pricing.

Cybersecurity threats and the need for robust data protection measures are also critical concerns, as Tyler's clients entrust the company with sensitive information and mission-critical systems.

Successful integration and realization of synergies from acquisitions, as well as the company's ability to effectively manage its cloud transition and product consolidation efforts, will be crucial in maintaining its competitive edge and delivering long-term shareholder value.

Conclusion

Tyler Technologies' position as a leading provider of integrated software and technology solutions for the public sector, coupled with its cloud-first strategy and strong financial performance, make it a compelling investment opportunity. The company's focus on innovation, deep domain expertise, and commitment to empowering public sector clients through digital transformation position it for continued growth and success. As Tyler Technologies navigates the evolving public sector landscape, investors should closely monitor the company's ability to execute on its strategic initiatives, manage risks, and capitalize on the significant opportunities ahead.