Information technology is extremely important in the modern era. After all, information is quite possibly the most valuable resource that almost any business can leverage. It is therefore essential to ensure that it is managed appropriately and optimally. importance. Generally speaking, when we talk about information management solutions and services, we discuss them in the context of how they relate to individual businesses or industries. But the fact is that the public sector also needs this kind of support. And a company that provides this type of service today is Tyler Technologies (NYSE:TYL). Over the past several years, Tyler Technologies has shown significant growth in both revenue and earnings. For the current fiscal year, it looks like growth will continue. However, it is not enough for a business to grow quickly. The company must also be priced at a level that makes sense to investors. And while Tyler Technologies would likely continue to grow at a healthy pace for the foreseeable future, the company looks considerably overpriced.
Information technology for the public sector
As I mentioned before, 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 meet the information technology needs of key business areas of cities, counties, schools and other government agencies. The company’s offerings include on-premises software solutions, as well as SaaS. The company also provides professional information technology services to its customers, ranging from software and hardware installation to data conversion, training, and more. Other solutions are also offered, such as ongoing customer support services, electronic document filing solutions, digital government services, payment solutions, and more.
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 tailored to each category in question. As an example, we only have to consider the Financial Management and Education category. In this area, the company provides financial management solutions such as modular fund accounting systems that offer modules for general ledger, budget preparation, fixed assets, requisitions, purchase orders, reports GASB, etc Included under this umbrella are utility billing systems that support billing and collection of metered and unmetered services and payment processing. It also offers student information systems for K-12 schools that help manage activities such as scheduling, grade reporting, and attendance. Other offerings include student transportation solutions that help manage school bus routes. Regarding the way the company generates income, it should be mentioned that the activity is very diversified. It currently offers software in exchange for license fees and royalties. It also provides subscription services, software services, maintenance and support work, and evaluation services.
Over the past few years, the management team at Tyler Technologies has done a fantastic job of growing the business. Revenue fell from $840.9 million in 2017 to $1.59 billion in 2021. Net income has been a little more volatile. It jumped all over the map, going from a low point of $146.5 million in 2019 to a high point of $194.8 million in 2020. In 2021, it stood at $161.5 million dollars. But where net income didn’t show a clear trend, operating cash flow did. It has increased each of the past five years, from $195.8 million in 2017 to $371.8 million in 2021. A similar trend can be seen by looking at EBITDA. Although it saw a slight decrease from 2017 to 2018, the overall trend was positive, with the metric dropping from $194.5 million in 2017 to $296.8 million last year.
For fiscal year 2022, management provided some guidance. They currently forecast revenues between $1.835 billion and $1.870 billion. At the midpoint, this would translate to a 16.3% year-over-year increase. So far, the business has gotten off to a very strong start. Revenue for the first quarter of 2022 totaled $456.1 million. This is 54.7% more than the $294.8 million generated a year earlier. In terms of profitability, the company expects a similar trend. However, there is some uncertainty here. Earnings per share are expected to be between $3.92 and $4.08. However, the company expects non-GAAP earnings of between $7.48 per share and $7.64 per share. Much of this wide disparity has to do with removing non-cash items from the equation in what is essentially looking at cash flow instead of earnings. For the purposes of this analysis, I prefer to focus on the earnings picture as defined by GAAP. In this case, the net income should be around $171 million for the year. This is 5.9% more than the profits generated by the company last year.
Again, Tyler Technologies is off to a good start. Net income for the first quarter of 2022 totaled $40 million. This is 8.1% more than the $37 million reached a year earlier. Operating cash flow fell from $71.7 million in 2021 to $53.5 million this year. But if we adjust for changes in working capital, it would have gone from $82.1 million to $97 million. Meanwhile, the company’s EBITDA increased from $51.3 million to $99.4 million. No indication was given for these other profitability parameters. But if we assume they would grow at the same rate as earnings, then cash flow from operations should be around $393.7 million, while EBITDA should total around $314.3 million.
Right now, shares of Tyler Technologies look unreasonably expensive. Using our 2021 numbers, the company is trading at a price/earnings multiple of 87.7. If management’s forecast for 2022 is correct, the company is still trading in a multiple of 82.9. Even if we took the non-GAAP estimates provided by the company, the stock would still trade at a price-earnings multiple, on a forward-looking basis, of 43.8. Using the price/operating cash flow approach, the company is trading at a multiple of 38.1. The 2022 estimate would drop that number only modestly to 36. And when it comes to the EV to EBITDA approach, the multiple would be 51.2. That drops to 48.4 based on the 2022 estimate.
To put the price of the company into perspective, I decided to compare it to five similar companies. On a price/earnings basis, only three of the five companies posted positive results. Of these three, two were cheaper than Tyler Technologies. The range for these companies was 27.9 to 607.3. Using the price/operating cash flow approach, the range for the five companies was 17.2 to 124. Three of the five companies were cheaper than our prospect. Using the EV to EBITDA approach, the ranges from 25.3 to 681.7. In this scenario, only four out of five companies performed positively, with three of them being cheaper than our target.
|Company||Price/Benefit||Price/Operating Cash Flow||EV/EBITDA|
|PTC Inc. (PTC)||27.9||32.3||25.3|
|DocuSign (DOCU)||N / A||32.3||681.7|
|Citrix Systems (CTXS)||45.6||17.2||28.3|
|Splunk (SPLK)||N / A||124.0||N / A|
There is no doubt in my mind that Tyler Technologies is an exceptional company that probably has a bright future ahead of it. On top of that, the company’s stock appears to be more or less fairly priced compared to similar companies. But no matter how you stack it, the stock is very expensive on an absolute basis. The growth doesn’t appear to be strong enough to justify the type of multiples the company is trading at. In the long term, I would view this as a “sustainability” prospect. But at the current price and in the current environment, I can’t help but rate the business as a “sell” at this time.