We see Tyler Technologies (TYL) as the clear leader in a slow-moving and underserved niche market of government operational software. We think the company has a wide, stable economic moat and is worth $247 a share. We believe there is a decadelong runway for 10%-plus revenue growth at Tyler, given the need to modernize local governments’ legacy enterprise resource planning systems and the company’s strong position in this market. Scaling software-as-a-service revenue should also help drive margin expansion over time, even if it pressures near-term profitability. The shares have gradually rerated since the 2008 downturn as local governments slowly normalized after the recession, subscription revenue has grown in the mix, e-filing has rapidly materialized into a significant opportunity, and deal sizes have grown.
Tyler addresses the needs of cities, counties, schools, courts, and other local government entities. Its two core products are Munis, which is the core enterprise resource planning system, and Odyssey, which is the court management system; together these constitute two thirds of revenue. These systems enable normal operations of governmental institutions, including financial management, human resources, revenue management, tax billing, and asset management. Tyler management says existing core systems at customer sites are at least 20 years old and running on ancient software code, with no next wave of incoming COBOL- and Fortran-fluent programmers to keep these systems running. We believe extending the life of these legacy systems is no longer tenable.
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Dan Romanoff, CPA does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.