Tyler’s Model Transition Accelerates Further, Rendering 2023 Outlook Light

Wide-moat Tyler Technologies reported fourth-quarter results that fell short of our estimates for both revenue and non-GAAP operating margin. We consider Tyler’s demand environment to be healthy with normal patterns of bookings, software subscriptions, and transactional revenue. However, guidance for 2023 was shy of our estimates, as Tyler expects faster software as a service (SaaS) growth but license revenue contraction. This mix shift should pressure both revenue and margins. In turn, we are lowering our fair value estimate to $475 per share, from $500 previously. We continue to see federal stimulus funds as supporting the market and see consistent growth and margin expansion over time, and we believe Tyler is the clear leader for municipal software needs, and therefore view shares as attractive.

While the pipeline remains healthy and state budgets are in good shape, the rapid deceleration in license revenue more than offset SaaS growth, causing the bulk of the overall revenue miss relative to our model. Total revenue grew 4% year over year to $452 million, compared with FactSet consensus of $456 million. Excluding one-time COVID-19-related revenue from its acquisition of NIC that have rolled off, revenue grew 6% year over year. Management noted good volume of medium-sized deals but nothing particularly large. Cross-selling efforts continue, with 17 signed in total since the NIC acquisition closed, but we still see more work to do in this area.

SaaS deals drove 86% of annual contract value, versus 91% last quarter and 77% a year ago. We expect this to creep up to more than 95% over the next several years, as the public sector is clearly onboard with SaaS consumption at this point. Non-GAAP annual recurring revenue was $1.496 billion, up about 8% year over year, bookings were flat year over year, and backlog increased 5% year over year. When normalized for COVID-19 and acquisition distortions, we see these forward-looking revenue indicators as healthy.