TYL

Tyler Technologies, Inc.

345.33
USD
5.52%
345.33
USD
5.52%
300.85 557.55
52 weeks
52 weeks

Mkt Cap 14.10B

Shares Out 40.84M

Chat
Send me real-time posts from this site at my email

Tyler Technologies: When Growth Just Isn't Enough

Summary Tyler Technologies is an excellent company that is growing at a rapid pace despite having already grown over the past few years. Long term, the picture for the company looks appealing and it will probably generate attractive value. But even this rapid growth does not justify the company's current valuation. I do much more than just articles at Crude Value Insights: Members get access to model portfolios, regular updates, a chat room, and more. Learn More » Information technology is incredibly important in the modern era. After all, information very likely is the most valuable resource that almost any company can harness. So making sure that it is managed appropriately and optimally is of the utmost significance. Generally speaking, when we talk about information management solutions and services, we are discussing it in the context of how it relates to individual companies or industries. But the fact of the matter is that the public sector also has a need for this kind of support. And one company today that provides this kind of service is Tyler Technologies (NYSE:TYL). In recent years, Tyler Technologies has exhibited significant growth on both its top and bottom lines. For the current fiscal year, it's looking like that growth will continue. However, it's not enough for a company to grow fast. The company also has to be priced at a level that makes sense for investors. And while Tyler Technologies would likely continue to expand at a nice clip for the foreseeable future, the company does look drastically overpriced. Information technology for the public sector As I mentioned already, Tyler Technologies operates as a provider of information management solutions and services for the public sector. To be more specific, the company's software solutions and services help to address the information technology needs of major areas of operations for cities, counties, schools, and other government agencies. Offerings the company provides include on-premises software solutions, as well as SaaS. The company also provides professional information technology services to its clients ranging from software and hardware installation to data conversion, to training, and more. There are other solutions provided as well, such as continuing client support services, electronic document filing solutions, digital government services, and payment solutions, etc… Today, the company provides these services grouped into nine different categories for its customers. The list can be seen in the image above. In short, however, what the company offers is catered to each category in question. As an example, we need only consider the Financial Management and Education category. In this domain, the business provides financial management solutions like modular fund accounting systems that offer modules for general Ledger, budget preparation, fixed assets, requisitions, purchase orders, GASB reporting, and more. Included under this umbrella are utility billing systems that support the billing and collection of metered and non-metered services and payment processing. It also offers student information systems for K-12 schools that help to manage activities like scheduling, grade reporting, and attendance. Other offerings include student transportation solutions that help to manage school bus routing. In terms of how the company generates revenue, it should be mentioned that the business is very diverse. It currently offers software in exchange for license fees and royalties. It also provides subscription-based services, software services, maintenance and support work, and appraisal services. Over the past few years, the management team at Tyler Technologies has done a fantastic job growing the company. Revenue increased from $840.9 million in 2017 to $1.59 billion in 2021. Net income has been a bit more volatile. It has jumped all over the map, ranging from a low point of $146.5 million in 2019 to a high point of $194.8 million in 2020. In 2021, it came in at $161.5 million. But where net income has shown no clear trend, operating cash flow has. It has risen each of the past five years, climbing from $195.8 million in 2017 to $371.8 million in 2021. A similar trend can be seen when looking at EBITDA. Although it did see a slight decrease from 2017 to 2018, the overall trend has been positive, with the metric climbing from $194.5 million in 2017 to $296.8 million last year. For the 2022 fiscal year, management has provided some guidance. They currently anticipate revenue of between $1.835 billion and $1.870 billion. At the midpoint, this would translate to a year-over-year increase of 16.3%. So far, the business is off to a really strong start. Revenue in the first quarter of 2022 totaled $456.1 million. This is 54.7% higher than the $294.8 million generated one year earlier. When it comes to profitability, the company expects a similar trend. However, there is some uncertainty here. Earnings per share are forecasted to be between $3.92 and $4.08. However, the company is forecasting non-GAAP earnings of between $7.48 per share and $7.64 per share. Most of this large disparity relates to removing non-cash items from the equation in what is essentially the same as looking at cash flow instead of earnings. For the purpose of this analysis, I prefer to focus on the earnings picture as defined by GAAP. In this case, net income should be around $171 million for the year. That is 5.9% higher than the profits the company generated last year. Once again, Tyler Technologies is off to a pretty good start. Net income in the first quarter of 2022 totaled $40 million. That is 8.1 percent higher than the $37 million achieved one year earlier. Operating cash flow did fall, declining from $71.7 million in 2021 to $53.5 million this year. But if we adjust for changes in working capital, it would have risen from $82.1 million to $97 million. Meanwhile, EBITDA for the company expanded, rising from $51.3 million to $99.4 million. No guidance was given for these other profitability metrics. But if we assume that they would increase at the same rate that earnings will, then operating cash flow should be around $393.7 million, while EBITDA should total around $314.3 million. At this time, shares of Tyler Technologies look unreasonably expensive. Using our 2021 figures, the business is trading at a price-to-earnings multiple of 87.7. If management's forecast for 2022 is correct, the firm is still trading in a multiple of 82.9. Even if we took the non-GAAP estimates provided by the company, shares would still be trading at a price to earnings multiple, on a forward basis, of 43.8. Using the price to operating cash flow approach, the company is trading at a multiple of 38.1. The 2022 estimate would decrease this only modestly to 36. And when it comes to the EV to EBITDA approach, the multiple would be 51.2. This drops to 48.4 if we rely on the 2022 estimate. To put the pricing of the company into perspective, I decided to compare it to five similar firms. On a price-to-earnings basis, only three of the five companies had positive results. Of those three, two were cheaper than Tyler Technologies. The range for these companies was from 27.9 to 607.3. Using the price to operating cash flow approach, the range for the five companies was from 17.2 to 124. Three of the five firms were cheaper than our prospect. Using the EV to EBITDA approach, the ranges from 25.3 to 681.7. In this scenario, only four of the five companies had positive results, with three of them being cheaper than our target. Company Price/Earnings Price/Operating Cash Flow EV/EBITDA Takeaway There's no doubt in my mind that Tyler Technologies is an exceptional company that likely has a bright future ahead for it. In addition to this, shares of the business look to be more or less fairly valued relative to similar firms. But no matter how you stack it, the stock is very pricey on an absolute basis. Growth does not seem to be strong enough to justify the kind of multiples the company is trading for. In the long term, I would consider this a 'hold' prospect. But at current pricing and in the current environment, I cannot help but rate the firm a 'sell' for now. Crude Value Insights offers you an investing service and community focused on oil and natural gas. We focus on cash flow and the companies that generate it, leading to value and growth prospects with real potential. Subscribers get to use a 50+ stock model account, in-depth cash flow analyses of E&P firms, and live chat discussion of the sector. Sign up today for your two-week free trial and get a new lease on oil & gas! Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Comment

Welcome! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue