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Tyler Earnings: Margins and SaaS Growth Punctuate Solid Results

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We are maintaining our fair value estimate of $475 per share for wide-moat Tyler TYL after the company reported solid third-quarter results that included revenue that was in line with our expectations and better-than-anticipated profitability. We view shares as attractive despite a post-earnings pop. SaaS growth ticked up, which is positive but something that we do not view as a durable trend. Management continues to guide to 20% compounded growth for SaaS through 2025. Margins were similarly strong, but we are not convinced that we need to make material changes to our model. Implied fourth-quarter growth was generally in line with our thinking. We continue to see federal stimulus funds as supporting the healthy environment and see consistent growth and margin expansion over time. We believe Tyler is the clear leader for municipal software needs and therefore continue to view shares as attractive.

We view in line revenue as a good sign that healthy demand trends persist with a healthy pipeline and state budgets that are in good shape. Total revenue grew 5% year over year as reported to $495 million, compared with FactSet consensus of $496 million. Excluding COVID-19-related revenue from the NIC acquisition, revenue grew 6% year over year. Importantly, SaaS revenue was up 26% year over year as reported. We see slight weakness in professional services offset by strength in other areas, but we are not overly concerned with any revenue line.

Profitability was clearly a bright spot within results. Non-GAAP operating margin was 24.8%, compared with 24.9% a year ago, and was better than our aggressive expectation. The shift to the cloud and duplicative data center costs continue to suppress margins. These pressures will ease in 2024 and 2025 as two proprietary data centers are shut down and the cloud migration matures. We think investors are well versed in the model transition dynamics for a software company and do not view these results as altering our long-term view.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Dan Romanoff

Senior Equity Analyst
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Dan Romanoff, CPA, is a senior equity research analyst on the technology, media, and telecommunications team for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers software.

Before Joining Morningstar in 2019, Romanoff spent 12 years in buy-side equity research covering the technology and telecommunications sectors, most recently at Holland Capital Management. Prior to that, he spent five years in sell-side equity research as an associate analyst at UBS and a senior analyst at Credit Suisse covering various areas within technology, including hardware, software, and semiconductors. Romanoff also has worked as an auditor and in valuation services for major public accounting firms.

Romanoff holds a bachelor’s degree in accountancy and a Master of Business Administration in finance, both from the University of Illinois at Urbana-Champaign. He also holds the Certified Public Accountant and Accredited in Business Valuation designations.

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